Many investors get spooked by market turmoil. They begin to question their strategies and feel tempted to pull out of the market and wait on the sidelines until it seems safe to dive back in.
Time and time again, however, the experts remind us to sit tight, because short-term market volatility is normal and inevitable. Still, for those that have seen their portfolios take a turn for the worse, it’s hard to sit back and wait.
“If you invest in the stock markets, you have to accept that volatility is a key component,” says Larry Bates, founder of the Wealth Game and a 30-year veteran of the investment industry. “If you’re not prepared to accept a 10 to 20 per cent decline in any given year, you shouldn’t be in the stock market.”
In fact, volatility can actually create opportunities, says Manmeet Bhatia, Senior Vice-President of Online Brokerage and Digital Wealth at Aviso Wealth, the parent company of Qtrade Investor. Many investors think they need to try to time the market and get in at the bottom, but even seasoned investors have a hard time accurately predicting when this will happen, he explains. “But with market volatility, another type of opportunity opens up with the option to dollar-cost average purchases during downturns,” he explains. “While this will not result in purely buying stocks at the bottom, it does take advantage of lower-cost purchases which will enhance gains if the investment or overall market rebounds.”
Sure, you might wish you had bought a stock that fell to $25 from $30, and regret buying it at $27. That’s just human nature, says Bhatia. But market bottoms can only be realized in hindsight. Still, purchasing shares in a company with strong fundamentals on the dips, if not at the bottom, offers a chance for investors to get better returns.
Embrace market volatility, because it’s part of the norm
To explain just how normal market volatility is, Dan Bortolotti, Associate Portfolio Manager at PWL Capital, shows his clients the historical equity returns for Canadian, U.S. and international stocks since 1970. Using 5% as the lower end of a supposed “normal” range, and 11% as the top, he points out that only seven out of the last 48 years actually fell within that range. Another 60% of the time, or 29 years, offered returns that were higher than the normal range, and only 12 years suffered through lower-than-normal returns.
“What that tells me is that ‘normal’ is actually pretty abnormal,” says Bortolotti. Yet, somewhere along the way, investors have falsely come to see long-term investing as a “slow and steady wins the race” road to above-average returns. “In fact, slow and steady is a fantasy,” says Bortolotti. “It’s actually more of a roller coaster ride.”
This fact is illustrated in how markets reacted in 2017 versus a decade ago. In 2017, the markets were buoyed by positive economic data and corporate fundamentals. As a result, global equity markets made gains that pushed stock indices to record levels. Better still, volatility was very low. Both the S&P 500 Index and the S&P TSX Composite Index had fewer than 10 daily moves of plus-or-minus 1 per cent.
A decade earlier, it was a much different story. Markets see-sawed through a recession before rebounding into a bull market again.
How to handle market volatility
Despite all the reassurance that volatility is normal and not necessarily something to be feared, both Bates and Bortolotti admit that for many, it can be a scary roller coaster to ride out. “It’s hard to discuss volatility in the abstract,” says Bortolotti. “You don’t know how you’re going to react until you’ve experienced it.”
Bhatia adds that for some, reducing exposure to volatility might be the thing to do. If you can’t sleep at night in volatile markets, trimming a part of the portfolio into cash might make sense. “It might not be the best thing to do financially, but if it means you’re going to stay invested in equities with the remainder of the portfolio, it might be the thing to do.”
You can prepare for volatility, and this preparation helps you not only deal with inevitable market ups and downs, but can also help you to treat the dips as investing opportunities.
The first step is to try not to panic, says Bates. Bortolotti agrees: The worst thing you can do is panic and pull out of the market, because what you’re actually doing is locking in those losses, he explains.
Instead of reacting to market volatility, stay disciplined and stick to your investment strategy or trading plan. “It’s not an easy thing to do, but changing strategies midstream can hurt your returns in the long run,” Bortolotti says.
If you do want to make changes to your portfolio, do your homework first. The key to managing volatile markets is to not let them sway your emotions, says Bates. “Often fluctuations turn out to be a lot of noise based on the news of the day,” he says. But, if you’ve done your homework and feel confident that the company or fund will weather the storm, then stick to your investment plan.
In fact, consider market volatility a friend or a signpost: an indicator of market opportunity. “It’s harder than it sounds, since everything is falling in price and you feel like a chump for buying, but it’s these dips that can provide opportunity,” Bortolotti says.
Practical trading tips during market volatility
Strong price fluctuations and high trading volumes can prompt a need to use different strategies. As an investor, one good strategy is to consider how you want to execute your trade order. For example, limit orders, where you provide instructions to buy or sell a certain amount of shares but only at a specified price (or better), can be a helpful strategy for adding shares at lower cost, or limiting losses on shares you already own. Just make sure you study and understand the pros and cons of the various kinds of limit orders before you use them.
For investors who see their portfolios decline in value, market volatility might not feel like an opportunity. But seasoned investors and financial professionals know that market volatility is inevitable. It’s just part of the market cycle—it’s how an investor responds to it that counts. It’s the nature of the markets to move up and down over the short-term. The key is not to panic. To make the best of market volatility, plan for the long term while strategically investing in short-term opportunities. Buying good companies when they’re on sale is a great way to build wealth.
Qtrade Investor is a division of Qtrade Securities Inc., Member of the Canadian Investor Protection Fund.
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