Most investors know that markets can be volatile – it’s part of a natural cycle and in many ways, it’s necessary. The occasional market drop normally results in healthy price corrections, great buying opportunities, and should not cause investor fear or panic. That said, outside influences can make it difficult to stay calm and “turn a deaf ear”. When the media presents fear instead of facts, it creates an unrealistic view of the markets and clouds the truth. When emotions are removed from the markets, it’s clear that things are far more stable than headlines convey.
For around twenty years, markets are actually the least volatile they’ve been1. In spite of this fact, it’s been reported that investor fear is increasing2, thanks largely to news reports that paint an alarming picture. There are incessant headlines about volatility, risk and how the market is in for “a rough ride”. The news often refers back to the financial crisis of 2008, comparing today’s conditions to the situation leading up to that crisis. This portrayal isn’t accurate or even fair. Looking at the markets through a factual, expert lens, one can see there’s much to feel good about. Corporate profits, interest rates, valuations, and sentiment – at home and abroad – are all contributing to a stable market3. So it’s quite important to not be swayed by too much media noise.
Keep calm and carry on
While no one can guarantee returns, a portfolio is guaranteed to experience ups and downs over the years. A good advisor successfully manages client expectations and educates, and rarely changes investment decisions based on volatility alone. A skilled wealth management professional constructs a portfolio to suit a client’s risk tolerance and objectives. This means that when volatility occurs, it’s important to not over-analyze the portfolio’s components because the sum of a properly constructed portfolio is greater than its parts; some components are carefully chosen with the expectation of market fluctuation. When a client is comfortable with the portfolio design and able to stay with the plan for the long term, the portfolio has greater chances to succeed because consistency normally pays off. Moving in and out of investment strategies in response to market conditions almost never pays off.
Misinformation = lost opportunities
When the media spread fear of a market crash, investors panic and tend to sell at a low and leave their cash on the sidelines. Markets rebound and investor confidence resume; now they buy high. Many investors lose a lot of potential returns making this mistake while all they had to do was remain invested. Other nervous investors leave international markets during periods of volatility. With this mindset, investors miss out on both diversification and great potential returns from overseas4. Risk management and tolerance are important, but when someone is overprotective, over-reactive, underinvested or improperly invested they may struggle to thrive. The educated client understands his/her portfolio construction despite any popular media narratives.
Properly informed clients have nothing to fear. They focus on the fundamentals which provide a better view of performance. During volatile periods, fear-mongering media outlets in pursuit of ratings rarely provide an insightful, factual, comprehensive financial analysis. When the news refers to a market “plummet”, investors must independently evaluate if the “plummet” is really a “dip”, remembering that fluctuations are necessary to market health and market growth.