The financial markets have gotten off to a rocky start this year. What’s caused this volatility? And does it present opportunities for patient investors?
First of all, several factors are behind the market volatility, including the war in Ukraine, higher inflation, rising interest rates and the lingering effects of the COVID-19 pandemic. However, while these factors may be specific to the recent market decline, volatility itself is a common feature of the investment environment. In fact, history shows that corrections of 10% or more happen about every year, and declines of 15% or more have happened every other year, on average. Furthermore, while 2022 has thus far been challenging for investors, it was preceded by a long period of strong markets, with the S&P 500 averaging more than a 20% return over the past three years.
Knowing the typical frequency of market volatility and reviewing the results of the past few years may make the current situation seem less shocking. But you don’t have to simply “ride out” the downturn – because a down market may give you the opportunity to buy more investment shares at good prices. Specifically, you can expand your holdings in companies that have good growth prospects due to strong management and products or services that provide sustainable competitive advantages. And this type of opportunity is important, because one of the keys to building wealth is to increase the number of shares you own in your various investments and hold them for the long term. While the market will always fluctuate, the long-term trend has been positive, particularly for well-diversified portfolios built with quality investments.
Of course, while it is a good idea to boost your share ownership at favorable prices, you still want to be strategic about it, rather than just buying whatever seems to be the biggest bargain. In reviewing your existing portfolio, can you identify any gaps that could be filled with new investments? Are there opportunities to further diversify your holdings? By owning different types of stocks, bonds, government securities and other investments, you can help reduce the impact of volatility on your portfolio. (Keep in mind, though, that diversification can’t guarantee profits or prevent losses in declining markets.) Or, if your portfolio has become “unbalanced” in some way, you could also use this time to rebalance it back to its original long-term targets. You might also consider setting up a systematic investing program in which you invest the same amounts in the same investments on a regular basis, such as monthly. When prices go down, you’ll automatically buy more shares, and when prices rise, you’ll buy fewer shares. (However, systematic investing does not guarantee a profit or protect against loss and you’ll need to be willing to keep investing when share prices are declining.)
Before this year, average annual returns have been solid for about a decade, which makes it somewhat easy to forget about normal market volatility and may have led to overly optimistic performance expectations. So, it would not be surprising if your initial reaction to the current downturn is one of concern. But by viewing the current investment environment as a chance to add quality investments at attractive prices, you can help yourself develop a behavior that can serve you well throughout your life as an investor.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
