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By Alex Fishman - May 1, 2019
We hear all the time from investors with specific concerns: Brexit, the Federal Reserve, China, the economy, global politics. And of course, market volatility.
Faced with these uncertainties, some investors panic when markets falter. Some may abandon their financial plans in a last-ditch "mayday" effort to avoid a market crash. And around this time of year, some even give in to the old investment adage "Sell in May and go away" to prevent losses. (More on that later.)
Fortunately, we know typically a long-term, comprehensive financial plan has more of an impact on investment success than specific events or market performance.
Investors had gotten used to an extended period of historically calm markets, so the sharp market drop at the end of 2018 came as quite a shock. For many, the subsequent market rally wasn't enough to lessen the pain—even if they recouped their losses.
The reason? While market volatility goes both ways, investors often associate volatility with negative rather than positive returns. Psychologists have long noted that "losses loom larger than gains ," meaning that the fear of losing money is stronger than the excitement of making money.
This is where a long-term view is important. Volatile market conditions will present opportunities as well as risks. A diversified portfolio—and a relationship with a trusted investment manager—can help you balance risk and reward and stay focused on the future.
Unfortunately, no. The phrase "Sell in May and go away" dates back centuries when London bankers and merchants spent the summer months in the country and returned in September, thus avoiding a summer market decline. There was some basis for a seasonal market drop; some speculate that fewer trades in the summer contributed to the trend.
However, there are disadvantages in attempting this type of market timing, even if you could pinpoint the exact days to sell and buy again. Selling investments can result in tax implications, or transaction fees if you work with an advisor.
Instead, we take a long-term view of investing. Of course, this doesn't guarantee that you'll make a profit, or that you won't lose money if the market declines. But we believe investors may have a better chance of success by spending more time in market because generally, the chances of making positive returns improve the longer investments are held.
Market's Best Days: Why Jumping In and Out May Cost Your Portfolio
Growth of $10,000 in the S&P 500® Index, 20 Years Ending December 31, 2018. Source: FactSet. This hypothetical situation contains assumptions that are intended for illustrative purposes only and are not representative of the performance of any security. There is no assurance similar results can be achieved, and this information should not be relied upon as a specific recommendation to buy or sell securities.
There's no surefire approach to beat volatility and still grow your money, so it's best to stick to simple, time-tested strategies:
Choose a mix of investments that don't necessarily behave the same way during a variety of market conditions. Make sure your percentage of each type of investment (known as asset allocation) is appropriate for your age, time frame and comfort with risk.
With this strategy, you sell your best performers and strategically buy more of your lower-priced assets to get back to your original allocation. It's the very basis of "buy low, sell high." Even so, rebalancing often feels wrong—why would you get rid of your winners? Because those high flyers may skew your chosen asset allocation, leaving you vulnerable to more risk than you intended.
When you get closer to your goal (particularly retirement), market declines have more of an impact on your portfolio because you have less time to recover your losses. Instead, consider moving to more conservative investments gradually over time. That may provide you opportunities for growth without being too exposed to aggressive, higher-risk assets—those that may see significant impact from market volatility.
When volatility strikes, choose a comprehensive plan over panic. We can help you tackle volatile markets head-on, with solutions to help you position your portfolio for a variety of conditions.
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Diversification does not assure a profit nor does it protect against loss of principal.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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