Have you or someone you know purchased an expensive home because it’s the one you’ve always dreamed about? You imagined your children playing in the yard or everyone gathering under one roof for the holidays. Could you afford it? Was it the right decision financially? When emotions run high, people tend to make choices they wouldn’t necessarily make if they had taken time to think through their actions properly beforehand.
This phenomenon can be especially true for how investors react to the latest headlines pertaining to the markets — when the market dips, some individuals neglect long-term perspective and focus only on the immediate issue. However, in many cases, this volatility is simply the price to pay to potentially capture the long-term returns. Historically, many of the market’s largest one-day gains came right after some of the largest one-day losses — in fact, five of the top 10 gains have followed top 10 declines.1
Nearly all investors with long-term investment plans have some degree of exposure to stocks, and it’s important they understand that equity returns can be quite volatile during any given time. This chart helps illustrate the level of volatility that can be expected from stocks, even in “good” years.
For example, the market has dropped 7 percent or more at some point during 19 of the past 20 calendar years. In fact, the market experienced a 10-percent or more intra-year drop (or drawdown) in 12 of the past 20 years. This means that volatile periods don’t just happen from time-to-time; significant drops in value tend to occur every single year.
The antidote to our emotions is to expect them. When volatility inevitably arises, it’s important investors stay focused on their core principles so their worries don’t lead to their detriment. Patience is key. While activity in the markets fluctuates on a daily basis, your long-term goals should remain steadfast.
You don’t have to navigate these ups, downs, anxieties and moments of euphoria alone. Having conversations with a financial professional plays a significant role in keeping you on track for your future. By professionally planning based on your long-term goals and needs, your financial advisor can help ensure you don’t place too much emphasis on day-to-day market behavior and can keep you from being enticed to “time” the market.
Ryan George is assistant vice president of marketing and communications at 1st Global. In this role, he works to connect financial advisors and wealth management assistants with information that will aid them in building thriving and efficient enterprises.
1st Global is headquartered at 12750 Merit Drive, Suite 1200 in Dallas, Texas 75251; 214-294-5000. Additional information about 1st Global is available via the Internet at www.1stGlobal.com.
Securities offered through 1st Global Capital Corp. Member FINRA, SIPC. Investment advisory services offered through 1st Global Advisors, Inc.
Disclosures: The chart assumes reinvestment of capital gains and dividends and no taxes. Past performance is not indicative of future returns. S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. The index is unmanaged and not available for direct investment.
1 “Biggest One-Day Gains, Losses.” The Wall Street Journal Market Data Center.