Upbeat music plays throughout.
Narrator: Market swings can cause many investors to second-guess their long-term investment strategies and begin making decisions out of fear.
In this video, you'll learn how to avoid these behaviors and maintain perspective when the market gets rough.
When markets turn down, investors may be tempted to sell their investments and get back in at the bottom to avoid losses. But timing the market like this consistently is very difficult and risks missing out on the potential rebound.
Animation: Chart shows the performance of the S&P 500® index (SPX) with and without best month from 1978 to 2021.
On-screen text: Disclosure: Source: Schwab Center for Financial Research. Monthly returns of the S&P 500® Index from January 1978 to December 2021 were used in the analysis. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested indirectly. For additional information, please see Schwab.com/IndexDefinitions. Past performance is no guarantee of future results.
On-screen text: Source: YCharts and CNBC
Narrator: For example, this chart shows the annual performance of the S&P 500®. The total return is shown in dark blue, and the light blue bar shows the total return minus the top-performing month for that year.
Take a look at 1978. If you held on to your investment all year, you'd have ended the year with a small but positive return: around 1%. But if you'd sold and missed out on the best month in 1978, you'd have seen a loss of around 7%.
Let's zoom in on some of the market's best days. This is a simple S&P 500 chart but look at the marks on it—those are the 10 best days of returns, anywhere from 6% to 11% in a single trading day. You can see some of the best days happened soon after major contractions.
Animation: Chart shows the bull and bear market contractions from 1974 to 2021.
On-screen text: Disclosure: Source: Schwab Center for Financial Research with data provided by Bloomberg. Past performance does not guarantee futures results.1
Narrator: Even when the stock market has turned bearish, stocks historically have recovered and reached new highs. For example, starting in 1974, the stock market turned bearish and lost more than 48% of its value by the time it hit bottom.
However, the following period experienced growth of 126%.
Each market contraction involved a loss and an eventual recovery, often followed by the market reaching new highs.
Animation: Chart shows the performance of the S&P 500® index (SPX) with and without best month in 1981.
On-screen text: Disclosure: Source: Schwab Center for Financial Research. Monthly returns of the S&P 500® index from January 1978 to December 2021 were used in the analysis. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested indirectly. For additional information, please see Schwab.com/IndexDefinitions. Past performance is no guarantee of future results.
Narrator: Let's go back to the other chart. In 1981, the market suffered a loss, and you might've been tempted to sell all your stocks.
If your timing was off and you missed out on the best-performing month, you would've lost around 14% instead of about 10%.
You can see how holding an all-stock portfolio could open you up to the wild swings of the stock market. Consider diversifying your holdings across multiple asset classes to manage the risk.
Again, you should keep a long-term perspective. This can help you weather market volatility, because as you remember, markets historically tend to go up, though past performance is no guarantee of future success.
One main method of handling market volatility may be creating a diversified portfolio, which is basically a fancy way of saying "don't put all your eggs in one basket." Essentially, you'd allocate a certain amount of your investment portfolio to different types of assets—like stocks, bonds, and REITs—not just one. Diversification spreads your money across different securities and asset classes in hopes of offsetting losses in one investment with gains in another.
Animation: Chart shows the portfolio return by asset allocation from 1971 to 2021.
On-screen text: Disclosure: Source: Schwab Center for Financial Research with data provided by Morningstar. Past performance is no guarantee of future results.2
Narrator: Take a look at this chart, which compares three portfolios: an all-stock portfolio, an all-bond portfolio, and a 50% stock and 50% bond portfolio.
From 1971 to 1974, you can see that when stocks fell, bonds rose, which helped offset losses from stocks in the 50/50 portfolio.
The aggressive, all-stock portfolio performed better in the long run than the all-bond portfolio, but it had some very rocky times on the way there.
Over the same four years, the all-stock portfolio contracted around 26%, while the 50/50 portfolio's diversification took the edge off; it only contracted around 10%. An investor would need to have a long-term perspective to handle the peaks and valleys of investing in all stocks.
When you look at a longer time horizon, like 1971 to 2021, you can see all three portfolios grew.
On-screen text: Disclosure: Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.
Narrator: The 50/50 portfolio grew less than the all-stock portfolio, but you can see how the diversification minimized the volatility.
Keeping your portfolio diversified and keeping a long-term perspective can help reduce portfolio swings that may accompany a volatile market.
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