Hello volatility. It's been a while.
It’s been a while since volatility graced us with its daily presence to this degree, and investors would benefit from revisiting some market basics to avoid overreaction. Market fluctuations are normal and expected and it’s important to realize some times are going to be more volatile than others.
Keeping your end game in mind can be tough to do when the news is full of sensationalist headlines that could put the most seasoned investor into a frenzy. ‘Bloodbath on Wall Street’ said one. Really? Investors can navigate their way by keeping perspective on a few key things.
Bull and Bear Markets
Since the beginning of time, both bull (expand) and bear (contract) markets are a natural occurrence in the market. The average bull (expansive) market lasts about 34 – 51 months, and the average bear (contracting) market lasts only about 7 – 14 months (Statistics: S&P 1956 – 2015, S&P/TSX 1985 – 2014).
Even though the bear is typically significantly shorter than the bull, it can feel much longer to the investor. Why? Even though investors spend much less time in bear markets, they remember them more because declining markets instill fear.
You never really know if you’re in a bear market until you’re in it. Investor behavior during bear markets is critical. History shows us a consistent pattern of recovery one to two years after the low of a bear market. Markets come back to reap great rewards. The risk is enduring a bear market, but the reward is the growth of a bull market. Understanding the bear. Bull and bear market trends.
Market Corrections
Sometimes a market drop isn’t the start of a bear market at all. Sometimes it is merely a correction, or pullback. Corrections are normal, and while it may be hard to see at the time, market corrections can be good for us.
Over time as markets rally stocks can become inflated, or artificially over-valued. It takes a market correction to normalize everything. In theory, the longer stocks go without a correction, the deeper the correction may be when it comes. Periodic corrections are healthy. Some say corrections are much like vegetables; many of us don’t like them but overall they are good for us. Economists welcome periodic corrections and take it as a sign the markets are normalizing.
Opportunities for Growth
Market cycles, corrections, and day to day volatility create opportunities and potential for growth. Market fluctuations bring opportunities.
Does it seem counterintuitive to welcome market fluctuations and corrections? As commonly noted in the investment business, the stock market is the only ‘store’ in the world where the shoppers run out of the store when things go on sale. Down markets are a great time to purchase investments at discounted unit prices. This type of market can be exciting because it means we have the opportunity to buy something cheaper than it was before.
Portfolio managers and investment professionals look to make the most of buying opportunities when markets are low. Volatile times and downside opportunities create greater potential to outperform benchmark indices.
It can be a good time for investors to consider dollar cost averaging. This is a simple investment strategy that builds wealth in volatile markets. You systematically invest regular amounts at regular intervals (i.e. weekly, monthly). When markets are up (or more expensive) you will buy a little less, and when markets are down (or a little cheaper) you will buy a little more. The greater the market volatility the better this system works. This strategy celebrates the swings of a volatile market. Making money in a volatile market. Let dollar cost averaging do the work.
Investor behavior during bear markets, corrections and volatility is critical. Don’t let media headlines shake your confidence in your long term growth and investment strategies.
This column appeared in This Month in Elgin April 2018 edition.