Market Volatility: Aim for consistency through the ups and downs of the market

Uncertainty surrounding government policies, geopolitical events, inflationary pressures, corporate results: the factors that can lead to market volatility are numerous!

Regardless of the cause, market fluctuations, especially when they are downward, can make investors worry and even cause them to panic.

However, when investing your money, you should expect periods of downturn and volatility. These are normal and unavoidable. The important thing is knowing how to react and what to do when they occur!

That’s what we’ll explain in this blog post.

What is market volatility?

Before we even get into what to do in times of volatility, we’ll start by explaining the concept itself.

Without getting into technical details, market volatility occurs when stock prices rise or fall dramatically and unpredictably. In fact, although volatility is often associated with market depreciation, it also takes into account market appreciation.

In other words, volatility is essentially a way of describing a market that is experiencing turbulence. This can occur over a period of days, weeks, months or even years.

What causes it? As mentioned, there are many possible causes. We could summarize by saying that it is any “factor that creates uncertainty and causes some investors to buy and others to sell” (1).

(1) Source : Fidelity Investments

What should you do when markets are volatile?

1. Keep your cool

When a sudden change occurs in the stock market, whether it is positive or negative (but especially if it is negative), it is important to stay calm and not panic.

It is very important not to make impulsive decisions to avoid buying when prices are high or selling when they are low.

When famous investor Warren Buffet was asked what he recommended for dealing with falling stock indexes, he simply replied, “I advise people not to watch the market too closely.”

While staying informed is obviously essential, it is in investors’ best interest to keep their distance and use their judgment in the face of media hysteria.

The biggest mistake you should avoid: consolidating your loss

If the markets go down, your investments lose value – temporarily – you should not withdraw your money. Why not? Because the money you “lost” will be lost forever! It will not have the opportunity to regain and/or increase its value when the markets rise again.

In fact, as most investors’ objectives are oriented towards the long term, a drop in the markets is not a reason to get rid of your investments.

When we analyze market prices over the years, we see that even if most markets go through periods of short-term volatility, they nevertheless maintain an upward trajectory over the long term.

In short, when the urge to sell your financial investments arises, remember the following principle: the longer you hold a stock, the more likely it is to generate a positive return.

Chart from « LA GESTION DES PLACEMENTS EN PÉRIODE D’INCERTITUDE » by Fidelity Investments

2. Stay the course

Ideally, if your financial situation allows it, it is recommended that you continue to contribute the same amounts to your savings when the stock markets are volatile, even when they are going through a depreciation period.

By making regular smaller investments, you won’t constantly be wondering when THE right time to invest is going to occur. More importantly, you’ll be sure not to miss the right time.

You’ll consistently be in the market, and when the market rises, you’ll be there to take advantage of it, allowing you to profit from the unpredictable price movement.

Remember: “It’s not about timing the market, but about time in the market”.

In addition, by continuing to make payments into your investments, even when prices are down, you will continue to acquire what are called “units”. If your investments decrease or stagnate, your number of units will still increase. Hence, when the market rises, you’ll have more units in your investment portfolio that can increase in value and you’ll have an easier time getting back on track!

See below to better demonstrate the positive impact of consistent payments to your investments.  This is an example based on actual historical data where an investor has been paying $500 per month ($6,000 per year) since 1994 into a fund that tracks the S&P 500 index:

• 1994 to 1999: The economy is doing well! The $36,000 in investment (6x$6,000) is already worth more than $80,000.
• 2000 to 2002: We’re losing big! The Dot-com bubble burst and the crisis following the September 11 attacks brought the “jackpot” down to $60,000, for $54,000 of invested money (9 years of 6000 towards savings per year).
• 2003 to 2007: The market is doing great! The $84,000 of investment (14 years) has a value of about $140,000.
• 2008: The financial crisis hits and the markets take a nosedive. Our $90,000 now yields no return over 15 years and is worth a little less than $90,000.
• 2009 to 2019: Stimulus plans have paid off and the stock markets are stronger than ever! After 26 years of constant savings ($500 per month), totaling $156,000, our investor accumulated more than $456,000.
• 2020: COVID-19 hits. At the end of April, we record a negative return of about 10% for the year. Our investor’s savings stand at $420,000. We can expect to see this amount decrease again by the end of the year.
• 2021 and beyond: Looking back on the last 25 years, we have every reason to remain optimistic and bet on constancy.

Note that this example does not take into account any tax benefits or the effect of inflation. Historically the S&P 500 has a return of about 10%, and around 7% when inflation is taken into account.

In short, for the vast majority of investors, there is no need to wait for the perfect time to invest their money. In the long-term, a winning savings strategy is more often a matter of consistency than of ideal timing.

Investing at a discount?

If you have a larger than usual surplus, you might want to take advantage of temporarily undervalued prices during a market downturn.

In this sense, when prices are low, you have the opportunity to buy units at lower costs! Remember: the more units you have in your investment portfolio, the more they will be able to appreciate in value when the markets eventually recover.

However, it’s important to remain cautious and not invest in just anything.

This is a good time to check in with your financial advisor to see if slight adjustments to your investor profile should be made, especially if you have shorter term goals such as a down payment!

3. Focus on diversification

Having a portfolio with diversified types of investments is a good way to limit the effects of market volatility, as it is unlikely that all of your investments will move in the same direction (especially downward) at the same time.

This means that some investments could be up while others are down, helping to offset losses from poor performance.

How can you diversify your investments? By investing in different asset classes (cash, fixed income and equities) depending on your personal situation and goals. A financial advisor can help you set up a personalized strategy based on your needs.

Don’t hesitate to contact us for an assessment of your financial situation!

In conclusion…

Patience and consistency are required in times of volatility. When prices fluctuate, do not lose sight of the strategy that has been established with your financial advisor. Always think about the long-term! Above all, don’t let panic get the better of you when you hear about financial market turbulence.