Keep a cool head during these stock market ups and downs
January 2022 was a rough month for investors. Despite a late, brief rally, the S&P 500 and Nasdaq Composite posted their worst months since the start of the pandemic with drops of nearly 10% and 9%, respectively.
Those losses can make it easy to overlook just how well the market had performed in the previous two years. Despite being the first year of the pandemic, 2020 saw the S&P gain 16%. And 2021 was even better, in part thanks to optimism over the new COVID-19 vaccines.
In fact, although many parts of the economy certainly suffered, the stock market was up an astonishing 47% over that two-year period.
But optimism has a shelf life. By late 2021, concerns over supply chain problems and runaway inflation left many investors feeling pessimistic. Add to that growing worries over higher interest rates and simmering geopolitical concerns (such as escalating tensions over Russia and Ukraine) and volatility took hold of the markets.
That uncertainty may continue over the next several weeks – a reality that has many investors feeling fearful if not downright frantic.
These emotions are completely understandable. After all, in most cases those hard-earned dollars represent either a nest egg or an active source of income. But it’s important to remain calm in the face of downturns. Not only are downturns a natural feature of the market and are called “corrections,” after all, they can also provide attractive investing opportunities for those who keep their heads.
What you can do
If you’re among those wondering if you should take some sort of drastic action in the face of these drawdowns, it can help to step back and ask yourself a few key questions. First, examine what’s behind your anxiety. Is it based in rational fear, or just a general sense that the “sky is falling?” It’s easy to get caught up in our own echo chambers of information and feedback, and 24/7 financial news is a key culprit. While it can obviously provide valuable information, it can create angst for viewers. So consider whether you need to take a breather from a news cycle before making any important decisions.
Remember, although it’s common for people to panic when they see a falling stock market, it’s both difficult and risky to try to “time” the market. Remaining invested reduces your risk of missing out on significant gains. According to a study by J.P. Morgan Asset Management of the S&P 500’s largest moves between Dec. 31, 1993 and Dec. 31, 2013, staying invested for the full 20 year span would have netted a 483% return for investors of the broad-based index. If an investor missed the 10 biggest upward moves over that period, the return was cut to just 191%. (And the return plummeted to a mere 20% if an investor missed the 30 best days over that 20-year period.)
As we mentioned earlier, market downturns can also provide an opportunity to buy equities at a lower price. But there’s no one-size-fits all strategy here. That’s why it’s always a good idea to have a financial advisor take a look at the totality of your plan.
Take the long view
Emotion can be the biggest enemy to a strong portfolio. So take the time to step away from the present and revisit your financial plan from 30,000 feet. You should also take the opportunity to re-evaluate your risk tolerance. How has the current downturn made you feel? Should you adjust the level of risk in your investments? If you decide the answer to that question is “yes,” we suggest first riding out the current volatility. But don’t be afraid to make a sound, reasoned shift at some point. (Again, it can help to talk to an experienced financial adviser.)
That said, before you make any investing decisions, make sure you have a sufficient emergency fund in place to help address any unexpected expenses that may come your way. Often times, simply having that cash “buffer” can provide the peace of mind you need to smoothly ride out market uncertainties while keeping your eye on the long term prize.
Hunter Yarbrough, CPA, CFP, is a vice president and financial adviser with CapWealth. He is passionate about taking a holistic view of personal finance, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.