Nooo!!! It is inevitable that the market volatility causes people to question the investments they hold and whether or not to sell them to “protect” their capital. I thought it would be helpful to step back and review what the “market” really is and what it is not. I believe the conclusion provides a clearer picture of what to do during significant market volatility.
Whenever volatility increases and we see markets decline, the emotional side of investing takes control. Our inherent fear of the unknown outcome can drive us to irrational decisions that have a far greater impact on our long term portfolio growth.
It is never easy to see your portfolio balance fall. We are driven to protect it in any way possible, because we seem to expect the worst which may be driven by the media and their attention on the worst case scenarios. It is important to look past the noise and think about what the underlying companies in your portfolio mean. The reality is that the stock market is nothing more than an auction trying to place a value on companies that are traded between investors. Well, for most of us, trading is not our goal of investing. The goal of investing in equities is to purchase companies that over the long term are going to grow and become more valuable as well as potentially pay us dividends as an owner of the company. When we look at the list of companies owned in a portfolio invested through mutual funds or ETFs, it is hard to imagine that the majority of the companies will not survive and thrive after the volatility fades. There may be some near term impacts in revenues or profits as a result of near term economic impacts, but once things stabilize, the revenues and profits will return and valuations will rebound giving growth to company values.
The typical process in markets is to be overvalued or undervalued. Nothing ever seems to hold course at a steady value because the value is derived from near term shifts in revenue and earnings. It is also impacted by the emotion of investors and their current sentiment. When sentiment is extremely negative, it has historically been a strong indicator that markets are bottoming and a turnaround will unfold. With the current market volatility, do not make the irrational decision to sell your investments due to the short term fears. The best approach is to maintain a diversified portfolio and stay the course in these turbulent times. In addition to being rewarded in the future for your steadfastness, you will continue to receive dividends from your investments which are extremely meaningful to the growth of you investments over time. If you are investing in a retirement plan, continue to make your contributions and take advantage of the lower prices to purchase into the investments.
Here is an interview with Jack Bogle the founder of the Vanguard Group on CNBC sharing his perspective to ‘Stay the course’ during market volatility.
Also, take a look at this slide from JP Morgan’s Guide to the Market that shows over the past 6 years we have seen other corrections with subsequent recoveries.