If you’re an investor, you know that the market is unpredictable. It can be great for months, only to suddenly drop before spiking back up once again. Over the past year, we’ve felt the shake of global events in our portfolios on several occasions, and understanding how these events affect our savings is important in keeping a clear head and persevering through the noise.
While you may feel panicked by the ups and downs of investing in the stock market, we want you to know first and foremost that fluctuations are normal, and they’re not a threat to your savings when you’re in it for the long haul. In fact, by understanding how fluctuations tend to play out, you can use the ups and downs to invest more rationally.
Lesson 1: Market fluctuations – whether predictable or not – are expected
As investors, we feel like we notice trends of how the market flows up and down. Having said that, there will always be significant events that are impossible to predict. The way these events impact the market is influenced by the billions of people who are reacting and making decisions based on new information as it becomes available to them.
We saw this in February when a new Fed Chairman was appointed and investors were worried that interest rates would increase faster than the economy could handle (see the quick drop we experienced during this time in the image below). It’s important to remember that trends change and moods change, now faster than ever before, and emotions can play just as big a role in how quickly the market bounces back after a significant event occurs.
Source: Yahoo Finance
Volatility is just part of the market. It scares off a lot of people who are worried about the downside, but once you can really understand that it is merely a symptom of how people handle new information, you can put a lot less stake in the volatile swings of the market.
Lesson 2: You can use market fluctuations to further the growth of your portfolio
Understanding that the market will be volatile can be an important asset in managing your investments. Think of it as a pendulum swinging: when it swings, it often swings back the other way.
You (or your advisor) can set up simple rebalancing thresholds in your account to take advantage of these swings. When the pendulum has swung enough to hit the threshold on either end, you can rebalance and bring your account back in line with your targets. The effect of doing this essentially means you are buying low and selling high.
The truth of the matter is, no one can predict how everyone else is going to react to global events, and how the market will react in return. The only thing you can do is understand that fluctuations are part of investing in the stock market, and how to use the ups and downs to your advantage in nurturing the growth of your portfolio.
If you’d like help with portfolio rebalancing, and would rather have someone else manage the swings, our team of advisors will take care of everything so you don’t have to. Get started below.