Don’t let market volatility rattle your focus on the long term.
In today’s interconnected global financial system, events on the other side of the world can have a direct impact on the performance of your investments. While it’s worthwhile to stay informed, it’s critical not to let the short-term impact of major events rattle your focus on your long-term plan.
Recent years have seen many examples where events in the political or financial world have caused steep market declines over short periods. One of the most significant recent examples is the Brexit vote. Financial markets anticipated that the U.K. would vote to remain in the European Union. The unexpected vote to leave sent shockwaves through global markets, with some stock exchanges dropping as much as 10% in the immediate aftermath.
Why does this happen?
The answer is that most investors fear nothing more than uncertainty. The vote to leave the European Union put a big question mark around the future of the U.K. and European economies. Even worse, many gravitated towards the view that Brexit would be bad for everyone, and they expressed this concern by selling off securities. When many investors sell at the same time, prices drop quickly. As prices decline, more investors become fearful of further losses, causing them to join the sell-off, creating a vicious circle.
Such events are almost invariably short-lived. Time and again we see markets jolted by a major event, only to regain their lost ground or even exceed pre-decline levels shortly thereafter. The danger in these situations is selling stocks that are dropping rapidly, then buying them back again after they’ve recovered; that is, selling low and buying high – the opposite of what every investor wants.
Typically, the best thing to do in these situations is absolutely nothing. It takes discipline and composure, but history shows time and again that as long as you remain patient and stay invested, the losses you see in the short term will reverse themselves.
The same thinking applies to more serious events, such as the Financial Crisis of 2008. This was no Brexit-style blip; rather, it was a market correction of monumental proportions, with many portfolios losing half their value. However, if you stayed invested – particularly in the U.S. stock market – you would have participated in a remarkably profitable recovery.
There is no doubt that remaining disciplined and focused on the long term in the face of steep market declines is easier said than done. But with knowledge of historical trends and the expert guidance of a trusted financial advisor, you’ll be well equipped to filter out the noise and remain anchored to a solid long-term financial plan.
To learn more about staying invested and disciplined during volatile times, talk to your financial advisor or visit AGF.com/RethinkVolatility.
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