Broker Check

Avoiding Emotional Decisions in a Volatile Market

| February 16, 2016
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With so much volatility in the past several weeks, many investors are quick to make emotional decisions. At Allied, we encourage clients to block out the hype: remove all emotion from investing and keep your head in the game. There are a lot of other factors to keep in mind when the market gets volatile. It is important to think about these five considerations before making any decisions.

1. The year is not always lost!

Data and trends show that long-term investors have sometimes ended up with gains in this type of market. Yes, it’s possible!
Many investors think that a big drop in the markets will result in full-year losses. Drawdowns are actually more common that most people realize – today’s volatility is actually a normal aspect of long-term investing. For example, the above Morningstar chart shows that since 1980, there was an average 14.2% decline. Across all of the years since 1980, more than half experienced declines over 10% or more. What’s really interesting about that data is that 58% of the years with a decline like that (more than 10%) the market ended up with gains.

2. Volatility in equities, not that bad.

As we see it, this kind of volatility does not really affect relative performance of equities. Volatility is also not as high as investors might think in this sector; it Index (CBOE Volatility Index) has actually normalized over the past year.

3. Stocks – weak earnings do not inevitably mean negative returns

Some investors are nervous about the erosion of U.S. corporate earnings; however, there is a frequently overlooked statistic that should be reassuring. From 1960 through 2008, when earnings declined, the average market gain was 11% (per BofA Merrill Lynch).

4. Timing is everything!

Sometimes volatile markets can be a great environment to invest! By leaving emotions out of the decision-making process, many investors can create opportunity out of others’ fear response. Hasty and emotional choices often lead to investor returns that lag asset returns. Recent studies conducted by Morningstar evaluated a fund’s stated return. It was then adjusted for inflows and outflows to derive asset-weighted investor returns. The results illustrate major underperformances across seven fund categories, such as U.S. Equity, Sector Equity, and Taxable Bonds to name a few.

5. A balanced portfolio is a happy portfolio.

At Allied, we encourage clients to meet annually so we can discuss how their portfolio is aligned to withstand normal market volatility. We encourage clients to stay invested and think of the long term benefits before making any decisions. Removing emotion can be difficult with the media hype and constant updates available. Having your financial advisor on your team helps alleviate the temptation to make hasty decisions – we encourage our clients to call us to talk about how the volatility may or may not affect investments.

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