Why Long-Term Investors Shouldn’t Panic About Market Fluctuation

Market fluctuation is an inherent part of the investment landscape, one that often causes uncertainty and, at times, panic among investors. Imagine, for instance you’re mountain biking down a hilly trail. Though you might be tempted to ride the brakes during a difficult descent, it’s important to maintain speed, as that momentum will carry you forward up the next hill.

Similarly, during a market downturn, you might think selling off investment and holding onto cash is the best strategy; however, by staying focused on long-term objectives rather than being swayed by the day-to-day ebb and flow of the market, you’ll have the means to weather the storm, and your future investment strategy won’t be such an uphill battle.

To take the analogy a step further, picture your wealth advisor as your trainer, someone who knows when to rehydrate (i.e., get more liquid and raise cash) and also when the ride is about to end. Their job is to get you on a smooth track before you reach the end of the trail (i.e., retire).

What is an example of market fluctuation?

A market fluctuation refers to the ups and downs in the value of financial assets like stocks, bonds, and commodities. These fluctuations can be driven by a variety of factors, including the following:

• Economic indicators
• Geopolitical events
• Corporate earnings reports
• Changes in investor sentiment

To illustrate, consider the market downturn in March 2020, when the onset of the COVID-19 pandemic triggered widespread fear and uncertainty. The S&P 500, a benchmark index of U.S. stocks, plummeted by over 30% in just a few weeks as investors scrambled to sell off assets.

Despite the sharp decline, the market began to recover later in the year as governments and central banks implemented measures to stabilize economies. By the end of 2020, the S&P 500 had not only recouped its losses but had also reached new highs.

What should an investor do when the market is fluctuating?

When the market is fluctuating, it’s essential to avoid making knee-jerk reactions. Instead of acting on emotion, investors should take a step back, reassess their long-term goals, and evaluate their overall investment strategy — making sure that risk management strategies have been incorporated into each layer. 

This approach allows for more informed decisions that are aligned with overall financial objectives, rather than being driven by temporary market conditions.

Should I stop investing when the market is down?

It might be tempting to halt investments or even pull money out of the market when asset prices are falling; however, history shows that market downturns often present opportunities to buy quality investments at lower prices.

Take for instance the 2008 Global Financial Crisis. During the crisis, the stock market saw massive declines, particularly when Lehman Brothers collapsed in September 2008. The S&P 500 fell over 50% from its 2007 peak, and many investors panicked, selling their stocks to cut losses.

However, for those who stayed invested, the rewards came quickly after the darkest days. The market hit its lowest point in March 2009, but from there, a historic recovery began. The S&P 500 more than doubled over the next five years and eventually rose to record highs, making up for the losses incurred during the crisis.

By continuing to invest during a market downturn, investors can potentially benefit from the market’s eventual recovery. This strategy, known as dollar-cost averaging, involves consistently investing a fixed amount of money at regular intervals, regardless of market conditions. Over time, this can lead to purchasing more shares when prices are low and fewer shares when prices are high, which can help lower the average cost of investments and enhance long-term returns.

Halting investments during a downturn can also disrupt the compounding process, where the returns on investments generate additional returns over time. Compounding is a powerful force in wealth accumulation, and missing out on even a few months of investment growth can have a significant impact on long-term results. Generally, during times of market uncertainty, investors should maintain their regular investment schedule instead of stopping investments, and focus on their long-term goals.

Continue reading: How to tell the difference between a bull market and bear market

Why should investors stay invested during market volatility?

Staying invested during periods of market volatility can be beneficial for several reasons:

• Predicting short-term market movements is extremely difficult, even for seasoned investors. Attempting to time the market — buying before a rally or selling before a downturn — often leads to missed opportunities and suboptimal returns. On the other hand, a long-term investment approach allows investors to ride out market fluctuations and benefit from the market’s historical tendency to grow over time.
• Market volatility can create opportunities to rebalance a portfolio. Rebalancing involves adjusting the allocation of assets in a portfolio to maintain the desired level of risk and return. During periods of market volatility, some assets may become overvalued or undervalued relative to others. By rebalancing, investors can take advantage of these shifts to buy undervalued assets at a discount and sell overvalued assets at a premium, thereby enhancing their portfolio’s long-term performance.
• Staying invested allows investors to benefit from dividends and interest payments, which can offer a steady income stream even during turbulent times. These payments can be reinvested to purchase additional shares, increasing the potential that the investor’s returns will be compounded over time. By staying the course, investors can attempt to weather market fluctuations and continue building wealth.

How to handle a volatile stock market

Handling a volatile stock market requires a combination of discipline, patience, and a clear understanding of one’s financial goals

1. Maintain a diversified portfolio

Spread investments across various asset classes, industries, and geographical regions. Diversification can help mitigate the impact of volatility in any single asset or market sector, reducing the overall risk in a portfolio. For example, when equities are experiencing a downturn, bonds or other alternative investments might perform better, helping to balance out the portfolio’s overall performance.

2. Focus on the fundamentals

Companies with strong balance sheets, consistent cash flow, and a history of dividend payments are often better equipped to weather economic downturns. By prioritizing quality investments, investors can reduce the risk of significant losses during periods of market turbulence.

3. Don’t fall prey to short-term news headlines

Media coverage of market fluctuations often amplifies fears and can lead to hasty decisions. Instead, investors should focus on long-term trends and the underlying economic factors driving the market. This perspective can help investors stay calm and make decisions that are in line with their long-term financial plan.

4. Have a well-defined financial plan

A financial plan outlines an investor’s goals, risk tolerance, and investment strategy, providing a framework for making decisions even when markets are turbulent. By sticking to the plan, investors can work to avoid being swayed by short-term market movements and remain focused on their long-term objectives.

5. Remember that time is on your side

If your advisor knows what they are doing you will have enough set aside in safer low risk assets like money markets and cash to cover near term expenses. Money invested in the stock market and other risky assets is likely money you won’t need to touch for several years. With that in mind remember that when markets are down you are buying more for less.  

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Worried about market fluctuation? Plan for the future with Avidian Wealth Solutions.

While market fluctuations are a natural part of investing, they can still cause concern, particularly for high-net-worth individuals managing significant assets. Therefore, it’s crucial to have a comprehensive wealth management strategy that is tailored to your unique financial situation, potential market risks, and long-term goals, to make sure that you’re prepared to ride out any market volatility. 

Avidian Wealth Solutions aims to help clients stay on course, regardless of market conditions. By focusing on long-term growth and risk management, our firm works with you to create investment portfolios that plan for market fluctuations while still being aligned with your financial goals. This approach can help alleviate the stress that often accompanies market changes, allowing you to choose to maintain confidence in your financial future.

​​In addition to investment management, Avidian Wealth Solutions also offers guidance on wealth management, estate planning, and high-income tax planning that are critical for long-term success. Contact us today to learn how to weather market volatility and continue building wealth for the future.

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