Beginner’s Guide to Market Volatility

S&P 500 decline is 'normal,' says investment strategist: Why you don't need to make big changes to your portfolio

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Key Points
  • The average length of the five bear markets since 1980 is 434 days from peak to trough, including weekends and holidays, according to data from Yardeni Research.
  • "When investors panic, they can make emotional decisions that will affect them over the long term," says Karen Heider, senior wealth advisor at Concenture Wealth Management.

Monday was another shaky day in the stock market, with the S&P shedding 3.1% on the session. Just another day in what has been a rough 2022 for investors.

All told, the broad stock market is down nearly 17% from its all-time high in January. That puts markets firmly in correction territory (defined as decline of 10% or more from recent highs) but short of a full-fledged bear market (a sustained drop of 20% or more).

For investors, who have spent years happily cruising along with steady portfolio gains, a precipitous drop in stock prices can seem catastrophic. News chyrons fill with nothing but bad news and the red numbers on your brokerage page grow larger and larger.

But in the midst of a downswing, it's essential to remember that, if you're saving for a long-term goal, such as retirement, dark days in the market are all part of the plan, says Gargi Chaudhuri, head of iShares investment strategies for the Americas.

"Many investors may not have experienced drawdowns that lasted more than a couple of days or weeks," she says. "It's imperative to recognize that market volatility and dips are normal. They're part of the market cycle."

For that reason, it's important to avoid making any wholesale changes to your portfolio in response to short-term moves in investment prices, experts say. But if the current bout of market volatility is keeping you awake at night, there are some tweaks you can make around the margins that can help you sleep easier. Here's what the pros recommend.

Market history: 'Bears haven't lasted'

When markets fall, your instinct may to be sell to avoid further losses. Moving to a more conservative portfolio may make sense if you're on the verge of retirement and need to live off your nest egg.

But if you're an investor who is years away from retirement, exiting the stock market hurts your chances at capturing gains should markets climb back up again, which, historically, they always have, notes Chris Maxey, chief market strategist for Wealthspire Advisors.

"Bears haven't lasted for a terribly long period of time, though some are more severe than others," he says. "But even if you invested at the top of all those bear markets, for someone who had a 20-, 30-, 40-year time horizon, it didn't matter."

The average length of the five bear markets since 1980 is 434 days from peak to trough, including weekends and holidays, according to data from Yardeni Research. While may seem like a lot, in the grand scheme of your life as an investor, it's a blip.

"You may not remember the 2007 - 2009 bear market, but the market significantly recovered and grew to new highs," says Karen Heider, senior wealth advisor at Concenture Wealth Management. "Long-term, things [tend to] come back up. If you don't need this money, and it's in a retirement account, don't touch it."

Still worried? Make some investing adjustments

OK, as with anything you're told not touch, you probably want to touch your portfolio just a little bit, right? As long as your making decisions with an eye toward your long-term plans and while being conscious of your relationship with risk, that's probably fine, experts say.

"You need to be allocated so that you can sleep at night," says Heider.

If the prospect of swings in the value of your portfolio will have you tossing and turning, now might be a good time to examine your tolerance for risk and consider making some moves on the edges to reduce volatility in your portfolio. In doing so, you're theoretically less likely find yourself making rash decisions. "When investors panic they can make emotional decisions that will affect them over the long term," Heider adds.

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Here are 3 ways experts recommend lowering your portfolio's volatility.

  • Buying bonds. For more conservative investors, tamping down on volatility may take the form of adding bonds, which tend to lose less than stocks when markets hit the skids. Buying bonds is a tricky move at the moment because interest rates are rising, which in turn erodes the value of bonds investors own (bond prices and interest rates move in opposite directions).

    Consider sticking with high-quality, short-term bonds, which are less sensitive to interest-rate moves than longer-dated IOUs, says Chaudhuri.
  • Adding blue chips. Think about the sorts of companies that tend to do well in turbulent times. "These companies will have strong profits, and the ability to pass on higher costs to consumers," says Chaudhuri. "We're recommending tilting your portfolio to these quality sectors. Gravitate toward companies with the ability pay dividends, which tend to have large near-term cash balances."

    Rather than trying to pinpoint individual companies, consider adding an ETF that invests in a broad basket of high-quality firms, she adds.
  • Diversifying. Research has shown that broadly diversified portfolios offer a smoother ride for investors. By holding a mix of investments that behave differently under different market conditions, you effectively ensure that something in your portfolio is always working.

In each of these cases, the smart move isn't to sell core portfolio staples, in favor of investments targeted at volatility. "This is about adding a little bit of a tilt in response to a high-volatility environment," says Chaudhuri. "This should not be a wholesale move away from a broadly diversified index fund."

The views expressed are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses.

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