Following a rocky September, major indices again experienced a sharp sell-off on Wednesday. The recovery was swift as stocks rebounded the next day, buoyed by positive sentiment from better-than-expected quarterly earnings from major tech companies and an improvement in economic data.
But with just 4 days to go until the US presidential election, investors may be in for more market turbulence. The Chicago Board Options Exchange’s CBOE Volatility Index (VIX) surged on Wednesday to its highest level since June, ending at 40.28. Commonly referred to as investors’ “fear gauge”, the VIX measures volatility expectations over the next 30 days.
The uncertainty about the US presidential election outcome, rising US and European coronavirus cases, and the lack of fiscal stimulus are all expected to keep volatility high leading up to and beyond the election.
It can be unnerving when markets whip back and forth, but here’s how you can keep your cool and stay focused on your investment plans.
Keep your emotions in check
During market corrections, your emotions can often be your own worst enemy. It takes restraint not to panic when markets fall but pulling money out of the market essentially turns your paper losses into real losses.
Letting yourself be affected by market fluctuations, no matter how severe, can lead to hasty investment decisions you may later come to regret. So ignore market fears and stay focused on your long-term investment goals.
Better yet, resist the urge to check your portfolio daily. Watching your investments go up and down do nothing but cause greater worry.
Stick to your investment plan
If you’re investing for the future – say, making regular contributions to your retirement savings account – a short-term downturn is not a reason to radically change your investment strategy and / or sell off huge chunks of your portfolio.
Your best option is simply to hang on tight. During the 2008 global financial crisis, those who stayed invested in the S&P 500 recorded twice the returns of those who fled to cash for as little as three months.
Making drastic changes to your portfolio now is counterproductive. But by holding on, you’re already in position to capture the gains when the market inevitably bounces back.
An opportunity to buy quality investments at a discount
Warren Buffett famously said that investors need to be “greedy when others are fearful, and fearful when others are greedy”. As other investors flee, his mantra suggests that a market decline could be a good time to cash in on lower equity prices.
The goal is to buy and hold these investments for the long term, giving them time to recover their value. An effective strategy for long-term investors to put their excess cash to work at discounted prices is by dollar cost averaging (DCA). Simply put, you invest a certain amount into the market at regular intervals. This way, you can capitalise on lower prices now while avoiding the risk of buying all at once ahead of another market drop.
This method also helps to take emotions out of your investing. By investing a consistent sum regularly – regardless of current market conditions – you eliminate the temptation to second-guess your investment strategy, or time the market.
Think long term
Market volatility can be unsettling, but it is part and parcel of investing. It’s worth remembering that over any 20-year period, the US stock market has never lost money. The average annual return over a 20-year period stands at about 6.7%.
As a long-term investor, your best strategy to navigate choppy markets is to stay invested and not panic. With the right mindset, you’ll be able to overcome any market ups and downs and emerge more resilient than you were before.