What Recent Market Volatility Means for Your InvestmentsBy Lee Korn | February 25, 2022
It’s been a turbulent beginning of the year for the stock market, which has many investors on edge. A number of global and domestic issues are disrupting market activity. The Russia-Ukraine conflict, inflation, and ongoing supply chain backlogs are stirring the pot. Meanwhile, interest rates are simmering in the background and will likely increase in the near future. Late January saw significant swings. More recently, the S&P 500 recently fell into a correction for the first time in two years, dropping more than 10% from its recent high.
Market corrections are actually more common than you might think, but they can still feel tough to stomach—especially when sensational headlines are making you feel even more uneasy. You may have the instinct to pull your investments during bouts of market volatility, but you may want to reconsider. Here’s why.
A Market Correction Doesn’t Necessarily Signal a Bear Market
The market typically sees three to five corrections annually—and a 10% to 15% correction per year on average. While some have accelerated into bear markets, which occurs when there’s a 20% drop from a recent high, most corrections represent temporary dips. More often than not, the S&P 500 actually ends the year higher following a correction. But watching things bounce up and down in the meantime can feel unsettling.
As investors prepare for interest rates to begin creeping upwards again, we’ll likely see market volatility return. It’s important to remember, however, that sporadic downturns don’t mean that the market is staying down. Rising interest rates actually indicate that the economy is improving and growing on its own. This, in turn, spurs stock market growth.
With regard to geo-political factors (most notably Russia’s invasion of Ukraine), market impact is typically tied to current economic health. When there are no signs of a recession, history shows that these types of conflicts usually cause short-lived volatility. Sharp and fast declines are normal, but things tend to rebound fairly quickly. While we are troubled by the humanitarian impact of the invasion, most data points suggest the economy is strong and a recession is not on the horizon. The fact that we’re now down over 10% on most stock market averages suggests that we may be nearing a bottom—and now may be a time to dial up market activity, as opposed to exiting. Just as investors can use inflation to their advantage, better understanding market volatility can actually help grow your wealth.
Staying the Course Is Most Important
There is no shortage of headlines stoking fear and anxiety among investors. Our best advice is to be mindful not to fall victim to media sensationalism that’s designed to keep you glued to your TV. The truth is that markets are complex, and reacting emotionally will likely lead you down the wrong path. As illustrated below, trying to avoid the worst market days will probably come back to bite you.
Numbers like these highlight the inherent flaws of trying to time the market. What’s more, most investors are playing the long game—volatility that crops up in the short term shouldn’t have too big of an impact on your long-term investment plans.
Staying fully invested is the best approach. Otherwise, you could miss out on future returns when the market rebounds. Adopting an “out of sight, out of mind” mentality can work to your advantage here. A recent CNBC survey found that nearly half of investors check their investments’ performance at least once a day. We highly advise against obsessively monitoring your investments. Watching your balances go up and down in real time can rattle your better judgement. Just as frequent social media activity leads our minds to comparison and anxiety, frequent market watching could lead to investment mistakes.
That doesn’t mean you should necessarily do nothing in the face of market volatility. Every person’s financial situation, long-term goals, and risk tolerance are different. The best response is staying fully invested with the guidance of an experienced financial professional. Now is actually a great time to review your overall investment plan and rebalance your portfolio accordingly.
At Opal Wealth Advisors, we’ve been busy helping investors reposition their portfolios for expected opportunities over the next several years. We’re also strongly urging folks to have cash available for short-term obligations. You can also put your cash to work in other ways. When the market dips, stock prices go down with it. Depending on your age and investment timeline, you could buy more now while stocks may be at a discount. Or you could convert funds in a traditional IRA to a Roth IRA and pay less tax on the conversion.
Beyond that, we’re focused on finding the opportunities that could be hiding in this volatility. Taking a strategic investment approach can position your portfolio to grow over the long haul. Connect with us sooner rather than later so we can explore what this all means for your finances.
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