Market Volatility Can Be Beneficial to the Long-Term Investor

October 22, 2014

Over the past couple of weeks, stock market indices have been more volatile on a day-day basis. Triple-digit changes used to be head-turning events; lately they seem to take place a few times a week. Judging by the usual financial media frenzy, investors seem nervous about a potential “market decline”.

People tend to have short-term memories about what the market activity. Dips are actually more common than most realize and something we should expect and welcome. If you look at a chart of the S&P 500 Index this year so far as a classic example, we’ve had several market dips already; in January, early April, late July and around 7% from the high point on September 18th, down to 1862 on 10/15, back up to 1950 one week later.

Yet, looking at the year in whole, you would see these four dips as (correctly) bumps in the road to an overall positive year, (so far). Markets do not and cannot go up constantly all the time and investors should take these dips as part and parcel of being invested in stocks; an ingredient required for the extra return offered by equities over less volatile investments like bonds and money market accounts or bank CD’s.

In fact, if you are a long-term investor (for retirement, college, etc), and are adding regularly to your accounts through payroll deductions to your 401k or monthly withdrawals from your checking account, you should be happy when markets dip. When Wall Street goes on sale, you pick up shares of your investments at cheaper prices and, if you are contributing a set percentage of your paycheck or a specific dollar amount each month, you could be buying more shares of your investments (at lower prices) for the same periodic amount you’re putting in. Who doesn’t love a sale?

During volatile times, the keys to investment success are:

  1. Ignore the day-day commentary in the financial media. Their objective is not actually to guide you– the agenda is to keep you watching, so their paid advertising sponsors get your attention as well.
  2. In order to reach your longer-term objectives in your financial plan (you do have a written financial plan, don’t you?), it’s likely your investments need to include stock investments to achieve the return you’re seeking. Accept that fluctuation in markets and account values are part of deal.
  3. If the short-term changes are too much to bear, consider changing your asset allocation to a more conservative stance so you can sleep better at night. Remind yourself that years from now, today’s worries will be long forgotten and you’ll thank yourself for staying the course.