Many investors stress over the frequent ups and downs of the markets. It causes many to wonder whether or not stocks will really help them achieve their long-term goals. In times like these, it’s important to remember:
Historically, stocks have trended higher over longer periods of time.
- For example, in early October 1987, the S&P 500 Index was valued at 327. On October 19th – Black Monday – the Index lost 22% in a single day. By the end of October, it was trading at 247. Many investors were stressed and wondering if their investments would ever recover. By December 31, 2018, the S&P 500 was trading at 2,506. That’s over 900% higher than the October 1987 lows.
- In March 2000, the world experienced the dot.com bubble. On March 10, the NASDAQ closed at 5,049. Less than one month later, on April 5, the NASDAQ closed about 17% lower at 4,169. By March 2001, the Index had fallen to 1,840. Again, many investors wondered if their investments would ever recover. By December 31, 2018, the Nasdaq Composite was trading at 6,635. Nearly 260% higher than the March 2001 lows.
- In 2008, the markets were faced with the Financial Crisis. The Dow Jones Industrial Average began the year trading at 13,044. It ended the year trading 33% lower at 8,776. Once again, many investors wondered if their investments would ever recover. On December 31, 2018, the Dow was trading at 23,327. Nearly 220% higher than the Financial Crisis lows.
Market volatility may create opportunities.
When a portfolio loses value in uncertain markets, it’s natural to wonder whether you should sell. Sometimes, investors do so without considering how the decision will affect their long-term goals. While selling isn’t always a mistake – perhaps, your asset allocation is out of balance or you want to harvest tax losses – selling without a strategy may be erroneous.
Here are several tips that can help investors make the most of opportunities and avoid mistakes during volatile periods in the markets:
- Keep perspective. As the examples above show, market downturns are normal. Historically, markets have recovered and delivered positive returns over the longer term.
- Stay the course. Our natural instinct leads some investors to sell when markets drop. This strategy locks in losses. In past downturns, when investors have been patient, they’ve recovered lost value after markets calmed, and moved higher again.
- Buy low. During periods of market volatility, investment managers may find opportunities in stocks at attractive values. By investing in these opportunities, investment advisors may position their clients for stronger long-term returns.
- Review your asset allocation. Does your current allocation still match your target allocation? After periods of significant market movements, your portfolio may need to be rebalanced.
- Review your risk tolerance. If you’re losing sleep over market volatility, it’s possible your risk tolerance is lower than you originally anticipated. In these situations, reducing overall portfolio risk may be a smart choice. Be sure to talk with your financial advisor before making any changes.
- Harvest tax losses. Selling investments during market downturns can be an effective strategy. Talk with your financial advisor and tax professional about whether you could benefit from taking the losses for tax purposes.
- Consider a Roth conversion. If you’ve been wondering about converting a Traditional IRA into a Roth IRA, completing the move during a market downturn could reduce the amount of taxes owed. Once converted, the funds may benefit greater from tax-free growth. Always discuss this strategy with your financial advisor and tax professional to understand the potential advantage and disadvantages.
Whether you’re investing for short-term or long-term goals, it’s important to recognize the opportunities created by market volatility. We recommend working with your financial advisor to make the most of them.
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