Volatility and the Long-Term Investor
Some reassurance on behalf of Affiliate and Financial Expert Lori Villegas in times of market volatility:
Stocks play a major role in most portfolios, but sudden market movements can cause doubts about the wisdom of a long-term commitment to equity investing. It is important, however, to put market volatility in the proper perspective. Sudden declines are hardly uncommon in the stock market, and in fact can be part of a normal market cycle. The risk of short-term loss is one that equity investors simply must be prepared to accept. While diversification and prudent portfolio management may reduce this risk, it cannot be eliminated entirely.
As we know from the past several years, a serious bout of market volatility can be alarming, particularly when you’re not expecting it. Amid such uncertainty, it is all the more important to keep your eyes on the market’s true prize: the potential for better-than-average long-term performance. Since the mid-1920s, long-term investors in US stocks typically have been rewarded for the risks they have taken—despite the occasional bear markets.
There’s no question that staying invested and doing nothing can be hard when the value of your equity portfolio has fallen by 10% or more. This may seem too risky compared to supposedly “safe” investments such as long-term government bonds or money market funds. But successful investors avoid the temptation to adjust their portfolios in response to every short-term dip in the market.
Investors should also understand that many widely accepted “facts” about market volatility are actually dead wrong. Here’s a look at a few of these myths and the realities behind them.