Staying Invested Through Volatility

Question:  I know financial markets are cyclical and volatile, yet I still have emotional responses, especially with the Russia/Ukraine war. What suggestions do you have to steer through volatility? 

Answer: The Russia-Ukraine situation is unfolding hour-by-hour as this is being written and there’s a lag time before this is published. Therefore, many things could change regarding this specific situation. First and foremost, let’s hope that additional casualties can be avoided with a diplomatic resolution. There is no way to measure the price of war and we cannot overlook the damage and heartbreaking loss of lives. That is the stark fact of free-will and humanity. 

With conditions escalating in Ukraine, uncertainty grows adding to the known market headwinds of high inflation and the transition toward tighter monetary policy. How long the conflict lasts, and the responses from NATO, Western leaders, OPEC, and central banks will influence financial markets. As seen in the days immediately following Russia’s invasion of Ukraine, high degrees of uncertainty cause markets to overshoot the downside and the upside.

It is helpful to examine past geopolitical conflicts to understand how this may play out in financial markets. For example, the 1990 invasion of Kuwait by Iraq and the Gulf War contributed to a 20% equity market decline over three months with stocks and recovered to new highs in just four months. In 1962, during the Cuban Missile Crisis, stocks fell 22% in three months. Over the following 12 months, they rallied to new highs. 

History doesn’t repeat itself, but it often rhymes. This could be an opportunity for those long-term investors comfortable with short-term volatility who are able to avoid making changes based on emotion. Acknowledging the ultimate downside potential in the coming days, weeks, or months, the next 12 months makes a risk/reward relationship compelling. 

Pullbacks can make you want to pull the plug on your portfolio; a reaction that’s often a mistake, especially for long-term investors. When markets react to geopolitical events, it’s helpful to consider a broader historical perspective before making any changes to your financial plan. Knowledge and perspective can help avoid making snap decisions based on emotion rather than strategic planning. 

Looking at the market over a longer time frame provides evidence of resiliency. Every single market decline since I started in the industry in 1983 has felt terrible, and these recent drops feel just as uncomfortable. When we track overall growth the market has achieved it’s clear that there are benefits to persistence, patience, planning and commitment. Remember these four things: 1. The stock market is cyclical. 2. As a long-term investor you’ll likely encounter numerous pullbacks and/or corrections. 3. Financial markets are resilient. 4. In the long run, the upturns have always been stronger than the downturns. 

Timing the market is nearly impossible. By staying invested, even through periods of volatility, investors can increase their chances of achieving higher returns. Look at the chart illustrating how missing even a few market days can impact overall returns. Over the past 20 years, the S&P 500 has grown at an annualized rate of 7.3%. However, removing only the five best trading days over that 20-year period would bring the total growth down to 4.90%, and missing the best 20 trading days drops the return to only 0.60%. 

Though easier said than done, try not to let fear drive investment decisions causing you to inadvertently miss out on important recovery days by trying to time the market’s every movement. Instead, speak with your CERTIFIED FINANCIAL PLANNER™ Professional about how your long-term plan is positioned to weather short-term volatility, and discuss whether temporary pullbacks are an opportunity to strategically add to your portfolio. 

Especially during downturns, your advisor can act as a sounding board for your concerns. By talking about current events and your overall financial plan, you advisor can provide reassuring perspective to help you stay the course during tumultuous times. Stay focused and plan accordingly. 

The opinions expressed are those of the writer as of February 27, 2022, but not necessarily those of Raymond James and Associates, and subject to change at any time. All investments are subject to risk, including loss. Diversification does not ensure a profit or protect against a loss in a declining market. This material is provided for educational purposes only. Past performance is no guarantee of future results. There is no assurance the trends mentioned will continue or that forecasts discussed will be realized. Economic and market conditions are subject to change. Consult your tax professional and financial advisor before making any investment decisions. Holding investments for the long term does not ensure a profitable outcome. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. The S&P 500 Index is an unmanaged market-capitalization-weighted index of 500 leading publicly traded companies.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article was provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie.