Putting current market volatility into historical perspective
can help you stay the course during turbulent times.
Dollar-cost averaging does not ensure a profit or prevent a
loss. Such plans involve continuous investments in securities regardless of
fluctuating prices. You should consider your financial ability to continue
making purchases during periods of low and high price levels. However, this can
be an effective way for investors to accumulate shares to help meet long-term
Asset allocation is a method used to help manage investment
risk; it does not guarantee a profit or protect against investment loss.
Coronavirus Concerns? Consider Past Health Crises
During the last week of February 2020, the S&P 500 lost
11.49% — the worst week for stocks since the 2008 financial crisis — only to
jump by 4.6% on the first Monday in March.1 By all accounts, the
drop was largely driven by ever-increasing fears about the potential effects of
the coronavirus (COVID-19) and its ultimate impact on the global economy.
Although many market observers contend that the market was overvalued and due
for a correction anyway, the unpredictability, strength, and suddenness of the
historic tumble was unnerving for even the most seasoned investors. If recent
volatility is causing you to consider cashing out of your stock holdings, it
may be worthwhile to pause and put recent events into perspective, using
history as a guide.
A look back
Since the turn of the millennium, the market's negative
response to health crises has been relatively short-lived. As this table shows,
approximately six months after early reports of a major outbreak, the S&P
500 bounced back by an average of 10.47%. After 12 months, it rebounded by an
average of 17.17%. Although there are no guarantees the current situation will
follow a similar pattern, it may be reassuring to know that over even longer
periods of time, stocks typically regain their upward trajectory, helping
long-term investors who hold steady to recoup their temporary losses, catch
their breath, and go on to pursue their goals.
end*||6-month performance, S&P 500||12-month
performance, S&P 500
|Avian (Bird) flu||June
|Swine flu (H1N1)||April
Source: Dow Jones Market Data, as cited on foxbusiness.com,
January 27, 2020. Stocks are represented by the Standard & Poor's 500 price
index. Returns reflect the change in price, but not the reinvestment of
dividends. The S&P 500 is an unmanaged index that is generally considered
to be representative of the U.S. stock market. Returns shown do not reflect
taxes, fees, brokerage commissions, or other expenses typically associated with
investing. The performance of an unmanaged index is not indicative of the
performance of any particular investment. Individuals cannot invest directly in
any index. Actual results will vary.
*End of month during which early incidents of outbreak were
**H1N1 occurred during the financial crisis, when, as during
other periods, many different factors influenced stock market performance.
What should you do?
First, keep in mind that market downturns sometimes offer
the chance to pick up potentially solid stocks at value prices, which could
position a portfolio well for future growth. Again, there are no guarantees
that stocks will perform to anyone's expectations — and decisions could result
in losses including a possible loss in principal — but it may be helpful to
remember that some investors use downturns as opportunities to buy stocks that
were previously overvalued relative to their perceived earnings potential.
Moreover, if you typically invest set amounts into your
portfolio at regular intervals — a strategy known as dollar-cost averaging
(DCA), which is commonly used in workplace retirement plans and college
investment plans — take heart in knowing you're utilizing a method of investing
that helps you behave like the value investors noted above. Through DCA, your
investment dollars purchase fewer shares when prices are high, and more shares
when prices drop. Essentially, in a down market, you automatically "buy low,"
one of the most fundamental investment tenets. Over extended periods of
volatility, DCA can result in a lower average cost for your holdings than the
investment's average price over the same time period.
Finally and perhaps most important, during trying times like
this, it may help to focus less on daily market swings and more on the
fundamentals; that is, review your investment objectives and time horizon, and
revisit your asset allocation to make sure it's still appropriate for your
needs. Your allocation can shift in unexpected ways due to changes in market
cycles, so you may discover the need to rebalance your allocation by selling
holdings in one asset class and investing more in another. (Keep in mind that
rebalancing in a taxable account can result in income tax consequences.)
After considering the points here, if you still have
questions about how changing market dynamics are affecting your portfolio,
contact your financial professional. Often a third-party perspective can help
alleviate any worries you may still hold.
1Based on data reported in WSJ Market
Data Center, February 28, 2020, and March 2, 2020. Performance reflects price
change, not total return. Because it does not include dividends or splits, it
should not be used to benchmark performance of specific investments.