Good news: ‘bad news’ doesn’t mean you should bail from the market.
In fact, pulling out of the market during times of volatility could cost you a lot in potential returns.
As an educator, there’s a certain comfort that comes from knowing what the future will bring when it comes to your finances. For example, you have a good pension in place, so you know that down the road you will have retirement income that you will be able to count on.
However, when you’re invested in a market that has seen its fair share of volatility recently, the only thing that is certain is uncertainty — and that can be scary.
Market volatility often goes hand in hand with ‘bad news’ headlines, which can create a cloud of uncertainty for investors. ’Uncertainty’ and ‘investing’ are not exactly the best of classmates, but. while it may be tempting to panic and get out when market conditions take a turn for the worse, reacting emotionally may cause you to lose sight of your long-term savings and investment strategy — and that could cost you greatly in potential returns down the road.
Educators Advisory Support Associate Nanaki Vij consistently reminds clients to stick to their long-term objectives when markets are volatile.
“Time in the market is better than timing the market”, says Nanaki. “Even with significant declines, an investor who stayed in the market over the past number of years has still had positive returns.” It’s also important to remember that you most likely worked with a financial advisor to create a plan that works for you, and that plan was designed to weather a few storms like this one.
And we’re not just being positive with that statement. The chart below shows how much more your investments increase in value if you stay invested:
Scenario 1: You remained fully invested in S&P/TSX over 10 years, in which case your $10,000 would have grown to $20,763, or 7.6% compound annualized return.
Scenario 2: During periods of volatility/uncertainty, you pulled out of the market for the top 10 days over the 10-year period (an average of 1 day per year). Instead of receiving 7.6% return, your return would have diminished to 1.3%.
Scenario 3: During periods of volatility/uncertainty, you pulled out of the market for the top 50 days over the 10-year period (an average of 1 week per year). Instead of receiving 7.6% return, your return would have diminished to -10.3%, a material difference of nearly 18%!
So the lesson here is when the going gets tough—the tough don’t get going, but instead stay invested in the market.
The reaction of the markets to major historical events also shows that the market rebounds.
The chart below reflects analysis conducted by Deutsche Bank. It depicts how, in World War II, the S&P 500 took three weeks to reach a bottom and another three to bounce back after a median drop of 5.7%.
While the market will always be unpredictable, one thing is certain — there will be future events that will cause volatility.
So don’t stress and don’t bail. Instead, stay the course and remain focused on your overall financial goals and you’ll reap the financial rewards for your patience and persistence in the long-term.
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