Markets gone mad! Why it’s important to ride out the rollercoaster
The market is often described as ‘volatile’ — an overused word that basically means it’s going through a period of ups and downs. We’re going through one of those periods now and it can be nerve-wracking, especially if you watch your investments dwindling during a dip… Surely it’s better to withdraw your money and stash it somewhere safe until everything calms down?
Try to resist! Often, if you withdraw during a low point on the rollercoaster, you won’t give your money a chance to bounce back.
Go with the flow
The stock market is a complex system of buyers and sellers, which creates ups and downs in share prices. It’s normal for the market to fluctuate and for your investments to decrease and increase accordingly.
Everyone is terrified of a major market crash. There have been five such crashes in the past 30 years, most notably during the 2008/9 global financial crisis. But look at what happened afterwards: The S&P 500 has risen 271% since March 2009, and the MSCI World Index has risen 172% over the same period.
The market has always recovered in the past, and it usually recovers strongly. Try to trust the system and leave your money invested to make the most of that recovery.
Time in the market is better than timing the market
Research shows that investors with well-diversified portfolios who stay put through periods of volatility generally do better than those who take their money out, or those who try to ‘time’ the market by strategically taking their money out and putting it back in according to the fluctuations.
Why is this? Well, it comes down to something amazing called the ’10 best days’. If you withdraw your money and you miss out on the 10 best-performing days of a particular investment, you’ll significantly compromise long-term growth. You don’t always need to win, but you do need to win those 10 best days…
Imagine two different investors, Sven and Sipho, who were each invested in the S&P 500 over the past 20 years. Sven decided to try and time the market and missed the 10 best-performing days. Sipho stayed invested the whole time.
Not a biggie for Sven, right? It’s just 10 days over 20 whole years… Well, you might be surprised to discover that Sipho’s investment is worth a whopping 50% more than Sven’s!
According to Forbes, the best days usually happen quite close to the worst days, which makes it extremely difficult to time the market. Using our ‘last 20 years’ example again, seven of the 10 best-performing days happened within two weeks of the worst 10 days!
Yup, as clever as you think you are, your chances of predicting the best-performing days are slim. That’s why most investment professionals recommend staying put.
What’s your risk tolerance?
If you find it uncomfortable to watch your investments fluctuate, you should try to understand why. Are you invested in a product that’s a bit too risky for your personality or your intended goals? Are you confident in your investment strategy? Do you need a better understanding of market volatility?
Yes, yes and yes? Then consider chatting to a professional financial advisor. An advisor will help you reassess your investment strategy, adapt it to your risk profile and align it with your long-term financial goals.
Of course, there are also times when withdrawing your money or selling your shares might make sense — if you’ve bought shares in a company that’s shutting down, for example. But generally, if you’ve invested smartly for the long term, you shouldn’t have to worry about the market’s ups and downs.
Good luck and hold on tight!