Reacting to Market Volatility
As COVID-19 continues to impact world markets, it helps to have some context to understand the nature of market volatility and decision-making strategies.
Let your strategy be your guide
When markets take a tumble it’s natural to be concerned about your investments. Corrections can be triggered by any number of issues including politics, financial concerns and, as experienced more recently, global health issues such as COVID-19. It can pay to remember that sticking to your investment strategy is usually the best way to respond to these situations.
Downturns through history
For good or bad, events that impact the market happen regularly. History demonstrates (again and again) that fluctuations, particularly those caused by global disease outbreaks, have very little effect on the market over the medium to long term.
Global epidemics v.s. MSCI World Index
As you can see in the chart, over the past 42 years downturns are often short-lived. So, while it can be scary to be in the middle of a correction, it’s important to remember that it likely won’t last and eventually the market will self correct.
Responding to a downturn
One of the most common questions people ask during a market correction is what they should do with their holdings. The answer really depends on your overall investment strategy.
How you react to a downturn has a lot to do with your personal risk tolerance. If you’re risk-adverse, your first impulse may be to sell equities to try and limit losses. Conversely, if you have a high-risk tolerance, you may be interested in buying more equities or engage in short selling with quick gains in mind. In either case, it’s important to know the difference between emotionally driven and strategically driven decision-making
There are of course situations in which selling or buying equities during a downturn can be a worthwhile strategic move. For example, choosing to sell some equities at a loss to offset taxes on capital gains.
Before you take any action, a good rule of thumb is to ask yourself how the decision fits within your investment strategy and how it will help you accomplish your financial goals. If you can’t effectively answer both these questions, chances are it’s not the right decision for you.
Strategies to help you through volatility
It can be challenging to separate your emotions from your finances, luckily there are a few easy things you can do to help you stay the course during market volatility:
- Limit how often you check your portfolio. It’s unnerving to see the value of your portfolio go down, but checking it too often during a downturn could push you to make emotional decisions. So stay aware, but not hyper-vigilant, by establishing a weekly, monthly or quarterly portfolio review schedule – and sticking to it.
- Think of the big picture. During a downturn focusing on short-term losses will only cause stress. Instead, try focusing on the long-term market trends and your ultimate financial goals. This will help you keep things in perspective.
- Remember the history. Downswings are part of the natural ebb and flow of the markets. The good news is that they are also historically short-term.
- Remember the adage. It’s often said, “buy low, sell high.” Based on your comfort level, given the recent market selloff, it might be a good time for you to consider the first part of this sentiment.
If you’re still concerned about market volatility, this article has seven specific strategies you can adopt to help mitigate risk in your portfolio.
Qtrade Investor is a division of Credential Qtrade Securities Inc., Member of the Canadian Investor Protection Fund. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds and other securities.