Are Volatile Stock Markets Good for Investors?

When the ups and downs of stock markets leave you stressed and wondering whether stocks really will help you pursue your long-term financial goals, there are two things to remember: Historically, over long periods, stocks have tended to move higher.

For instance, at the start of October 1987, the Standard & Poor's (S&P) 500 Index was valued at 327. On Black Monday, October 19, the Index lost 22 percent in a single day. By the end of the month, it was trading at 247. Many investors wondered if their savings and investments would ever recover. (1, 2)

By October 31, 2018, the S&P 500 was trading at 2,711.74. (3) In March 2000, the dot.com bubble burst. On March 10, the NASDAQ Composite closed at 5,049 and less than a month later, on April 5, the Index was trading at 4,169 – a loss of about 17 percent. Many investors wondered if their savings and investments would recover. (4, 5)

By October 31, 2018, the Nasdaq Composite was trading at 7,304. (6) In 2008, when the financial crisis roiled stock markets, the Dow Jones Industrial Average opened the year at 13,044. It finished the year at 8,776 – a 33 percent loss. Many investors wondered if their savings and investments would ever recover. (7) On October 31, 2018, the Dow was trading at 25,115.76. (8)

The point of this brief history of stock market downturns is U.S. stock markets are volatile. They suffer losses and experience gains. However, over time, indices have trended higher. For investors with long-term financial goals, that can be good news. Those who can tolerate volatility may find including stocks in well-allocated and diversified portfolios help enhance returns over time. Keep in mind, of course, that past performance is no guarantee of future results.

Market volatility may create opportunities. When a portfolio loses value in uncertain markets, it's natural to wonder whether you should sell. Sometimes, investors do so without considering how the decision will affect their long-term goals. While selling isn't always a mistake – perhaps, your asset allocation is out of balance or you want to harvest tax losses – selling without a strategy may be erroneous.

Here are a few tips from Fidelityand CNBCthat can help investors avoid mistakes and make the most of opportunities during periods of market volatility:

Keep Perspective

As the examples above demonstrate, stock market downturns are normal. Historically, markets have recovered and delivered positive returns over the longer term. (9) Stay the course. Our natural instinct for self-preservation leads some investors to sell when markets drop. This locks in losses. In the past, when investors have been patient, they've recovered lost value when markets moved higher again. (10)

Buy Low

During periods of market fluctuation, wealth managers may find opportunities to buy stocks of attractive companies at attractive prices. By investing in well-priced opportunities, investment advisors may position their clients for stronger performance. (10)

Review Your Asset Allocation

If you haven't done it recently, review your asset allocation strategy. Does it still match your target allocation? Sometimes, after periods of strong market performance, a portfolio will need to be rebalanced.

Review Your Risk Tolerance

If market volatility is causing you to lose sleep, it's possible your risk tolerance has changed or is lower than you anticipated. If that is the case, reducing overall portfolio risk may be a wise choice. Talk with your financial advisor before making any changes. (10)

Harvest Tax Losses

Talk with your financial advisor and tax professional about whether you could benefit by selling investments during a downturn and taking the losses for tax purposes. (10)

Whether you're investing for short- or long-term financial goals, it's important to recognize the opportunities created by market volatility, and work with your financial advisor to make the most of them. If you would like to discuss your portfolio and positioning yourself for the long term, give us a call.

- Grant White, CIM, CFP

Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.

Sources

1 https://www.investopedia.com/terms/b/blackmonday.asp

2 https://finance.yahoo.com/quote/^GSPC/history?period1=557384400&period2=568101600&interval=1d&filter=history&frequency=1d

3 https://finance.yahoo.com/quote/%5eGSPC/history?period1=557384400&period2=568101600&interval=1d&filter=history&frequency=1d

4 http://time.com/3741681/2000-dotcom-stock-bust/

5 https://finance.yahoo.com/quote/^IXIC/history?period1=951890400&period2=955774800&interval=1d&filter=history&frequency=1d

6 https://finance.yahoo.com/quote/%5EIXIC/history?p=%5EIXIC

7 https://finance.yahoo.com/quote/^DJI/history?period1=1167631200&period2=1230789600&interval=1d&filter=history&frequency=1d

8 https://finance.yahoo.com/quote/^DJI/history?period1=1509598800&period2=1541134800&interval=1d&filter=history&frequency=1d

9 https://www.fidelity.com/viewpoints/investing-ideas/strategies-for-volatile-markets

10 https://www.cnbc.com/2018/04/02/how-investors-can-take-advantage-of-market-volatility.html