Review how to better prepare your portfolio for a downturn – and how to take advantage of one if it occurs.
Market volatility is an inevitable part of investing. And it’s understandable that tumultuous times will likely trigger emotional responses to match. But it’s important to remember to take a deep breath, pick up the phone and talk to a trusted advisor – one who has seen an unpredictable market or two and the subsequent recovery.
The best-performing asset class often changes from year to year, and as shown in the chart below, the difference between the best- and worst-performing in any year can be significant. Most times this is due to correlation – a statistical measure of how two securities move in relation to each other. If returns are negatively correlated, when one return declines, another return is likely rising. And while diversification does not assure a profit or protect against loss in declining markets, it provides the opportunity to reduce risk, temper volatility and enhance risk-adjusted returns.
Diversification does not ensure a profit or protect against loss. The process of rebalancing may result in tax consequences. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Just like life, the market has ups and downs. For example, the chart below highlights several S&P 500 index pullbacks in recent years. While it illustrates that declines are fairly common, it also shows the gains that followed each time. But you have to participate, not withdraw, to benefit from those gains. The chart also reveals that investors who chose to pull their money out of equities during those periods may have missed some of the market’s biggest gains because some of the market’s best days came right after periods of steep decline. Also, remember that a decline can present opportunities to buy quality investments while they’re temporarily undervalued. This can enable you to invest in high-quality companies at lower prices and capture additional value.
Source: Morningstar; Past performance may not be indicative of future results. There is no assurance these trends will continue. The market value of securities fluctuates and you may incur a profit or a loss. This analysis does not include transaction costs which would reduce an investor’s return. The S&P 500 is an unmanaged index of 500 widely held stocks. An investment cannot be made directly in this index.
When considering market volatility, topics you may want to discuss with your advisor include: