Bouts of market volatility are an unnerving, but normal, feature of long-term investing. Since 2000, the S&P 500® index has experienced 12 “corrections”—when it sank anywhere between 5% and 20%—and two “bear markets,” during which it lost 20% or more.¹ They’re not fun, but you can expect to see market declines periodically throughout your investing career. Our investing principles don’t change when the market is down, and yours shouldn’t either.
But it’s hard to sit still when the market is sliding. You can’t help but think: “Shouldn’t I be doing something?” Every investor is different, but here are a few steps that everyone should consider.
During market volatility:
- Resist the urge to sell based solely on recent market movements. Selling stocks when markets drop can make temporary losses permanent. Staying the course, while difficult emotionally, may be healthier for your portfolio. This doesn’t mean you should hold on blindly, but we suggest taking into account an investment’s future prospects and the role it plays in your portfolio, rather than being guided by noise and fear.
- Adapt your trading to fast-moving markets. If you must trade during volatile markets, take current conditions into account when entering orders. There are defensive steps you can take to protect an unrealized gain or limit potential losses on an existing position, such as stop orders and stop-limit orders. These can help give you more confidence when markets are volatile.
- Take the long view. Markets typically go up and down, and you’re likely to experience several significant declines during a long investing career. But even bear markets—that is, periods when the market fell by more than 20% for longer than two months—historically have been relatively short. The Schwab Center for Financial Research looked at both bull and bear markets, based on the S&P 500 Index, going back to 1966, and found that the average bear market lasted a little longer than a year. The longest of the bears was a little less than three years, and it was followed by a nearly five-year bull run. Timing the market’s ups and downs is nearly impossible, but all investors would do well to ignore the noise and stay focused on their plans.
Bear markets generally occur every five to six years
Source: Schwab Center for Financial Research with data provided by Bloomberg. The market is represented by daily price returns of the S&P 500 Index. Bear markets are defined as periods with cumulative declines of at least 20% from the previous peak close for longer than two months. Its duration is measured as the number of days from the previous peak close to the lowest close reached after it has fallen at least 20%. In the chart, periods between bear markets are designated as bull markets. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance does not guarantee future results.
- Review your risk tolerance. Some investors learn the hard way that they aren’t as willing to face a sharp drop in the value of their portfolios as they had assumed. Similarly, risk you took on years ago may no longer make sense given your current situation and life stage. An aggressive allocation has historically gained more over time, but at the price of greater volatility—which can be especially risky if you don’t have much time to recover. Market downturns sometimes can be a wake-up call to consider adjusting your target asset allocation.
- Make sure you have a diversified portfolio. Volatile markets also can reveal that portfolios their owners thought were appropriately diversified in fact aren’t. If you haven’t looked at your portfolio recently to make sure you understand what each asset class is doing and that the mix matches your target asset allocation, now is a good time to become reacquainted with it.
- Consider including defensive assets for stability. Defensive assets, such as cash and bonds, can help stabilize a portfolio when stocks are slipping. Also, if you expect to spend from your portfolio within the next few years, it’s a good idea to hold those funds in assets that historically have been relatively liquid and less volatile than stocks, such as cash and short-term bonds. This can help you avoid having to sell in a down market.
- Rebalance your portfolio as needed. Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to positions that have become underweight. It’s a good idea to do this at regular intervals.
¹Source: Yardeni Research Inc., “Market Briefing: S&P 500 Bull & Bear Markets & Corrections,” September 6, 2017.
What you can do next
Market volatility is unnerving, but it’s a normal—and normally short-lived—part of investing. If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the noise and focus on your long-term goals.
If you need help building a diversified portfolio, Schwab’s investor profile questionnaire can help you determine your risk profile and match it to an appropriate target asset allocation.
Need more help? Call 800-355-2162 to talk to a Schwab investment professional.