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Riding Out Rollercoaster Markets

Riding out market volatility is much like riding a rollercoaster: staying securely in place with your investments will help safeguard you from those drastic market dips.

Articles by sherrillstgermain
By Sherrill St. Germain Financial Columnist, Betterment Published Aug. 16, 2019
Published Aug. 16, 2019
3 min read
  • Rollercoaster markets happen and they are perfectly normal, but with them comes investor trepidation.

  • Putting together a solid financial plan and working with a fiduciary advisor can be your best defense against market volatility.

Raging Bull. Great Bear. Rampage. Dare Devil Dive. These are the names of roller coasters guaranteed to deliver chills and thrills. They’d also make good taglines for investment market conditions of late. As an investor, you may be asking yourself, “What’s happening? Why are there so many hair-raising ups and downs? What safeguards should I be putting in place?” Here’s your guide on the recent market volatility, and how to help protect yourself while riding out this rollercoaster.

What’s Up (and Down)

Trade wars. Interest rate hikes. Government shutdown. Brexit. These developments sent US investors on a wild ride in late 2018. In case you were distracted by holiday prep, here’s what went down.

During the most recent Christmas week, the Dow Jones Industrial Average swung 350+ points on all but one trading day. That included a record-setting plunge of 653 on Christmas Eve. Then another record-breaker happened the day after Christmas. With a whopping 1086 point gain, the Dow clawed back the previous session’s losses and more.

But the chills and thrills didn’t start or end there. Both the Dow and the S&P 500 had their worst December since 1931. By year end, the market had suffered its biggest annual decline since 2008 ushered in The Great Recession. En route, investors were treated to half of the ten biggest single day swings in market history, all happening within one year and on the heels of the longest bull market ever.

Is this the start of a new normal?

Thankfully, a key measure of market volatility suggests not. According to a recent Forbes article, the standard deviation of the S&P 500 was 15.8% in 2018, very nearly matching its 15.6% long-term average. Contrast this to 2017, when the S&P 500 logged a standard deviation of only 6.7%, the second lowest on record and not even half that of 2018.

Of course, as recent events have reminded us, that period of relative calm could not last forever. But it may have lulled us into a false sense of security, causing 2018’s return to “the old normal” to feel all the more whiplash-inducing.

Along for the Ride

Investors aiming to successfully weather volatile markets might want to look to the past for guidance and reassurance. It’s been said that history doesn’t repeat itself; rather, it rhymes. So too investment markets. It goes something like this.

Roses are red, violets are blue.

Markets go up,

But must come down too.

We can’t guess how far,

And we can’t know how long.

But for those who are patient,

Returns should be strong.

Sounds simplistic, trite even, but if you invest, expect ups and downs. You may not love the downs, but just remember that uncertainty typically drives returns. That’s why you having a financial plan suited to your goals and tolerance for risk is key. Everybody knows that – intellectually, at least. As easy as it is to understand all of that, it’s usually harder to practice.

Remembering to put good investing habits to use can be difficult  when you see the downside of uncertainty at work on your money: The thing needed to put food on the table, a roof over your head, your kids through college, and a retirement in the realm of possibility.

“I plan to buy high, sell low,” said no one ever. But on average, investors tend to fare much worse than the market, because that’s exactly what many unintentionally do.

One study found that the average equity fund investor underperformed the S&P 500 by almost 3% annually for the two decades through 2016. Sure, fees account for some of that, but most of the gap is the result of human nature driving badly-timed, fear-based decisions.

Even investors who get out of the market near market highs still have to guess “right” about when to get back in. With fear driving actions, most investors wait too long.  Unfortunately, that often means missing a big chunk of the gains, which usually occur when markets first start to recover. To wit: The S&P 500’s worst 7 quarters since 1940 were followed by a healthy average 23% return in the year that followed.

Of course, there’s no guarantee markets will recover from such precipitous drops, whether they are driven by global events, intrinsic value, or fear. But a rational investor with knowledge of market performance through challenging times past would be hard-pressed to bet against it.

Stay Buckled in Your Seat

Repeated time and again over multiple market cycles, investor behavior during challenging times is a key driver of net worth and, ultimately, the ability to meet your financial goals. During market rollercoasters like this most recent one, it’s important to stay buckled in your seat and stick with your financial plan.

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