Learning Center

Handling Market Volatility

 

When the market is volatile and unsettled, it's important to remember why you are investing in the first place.

 

In the investment world, the word "volatility" refers to the changes (or fluctuations) in securities prices that occur every single trading day. An investment or asset class is considered very volatile if its price moves up and down frequently, at times by very large amounts. Volatility can be measured by tracking the range of an investment's or asset class's market price movements over a period of time.

What happened in February 2018 offers a good example of market volatility. The Dow Jones Industrial Average fell approximately 666 points on February 2, 1,175 points on February 5, and another 1,033 points on February 8. However, the Dow rose more than 300 points on two other trading days during the same period.

Are there lessons you can learn from this period of extreme volatility? Just as importantly, are there strategies you can employ to bring you closer to your financial goals irrespective of uncertainty in the financial markets? Keep the following in mind as you watch events unfold.

Volatility Is Not Unusual

Securities rise and fall in value every trading day. Price movements are not at all unusual. It is important to put the declines in perspective. The decline in the Dow Jones Industrial Average in the four days between February 5 and February 8 seemed a little scary, but in percentage terms, it was a decline of only 6.5% in the overall value of the Dow.

Paper Losses Don't Become Real Losses Until You Sell

While it's certainly unsettling to see the value of your portfolio decline, it's also important to remember that the decline is only a loss on paper. It does not become real until you decide to sell or redeem those securities.

Diversification Is Key

While there is no guarantee, investing in a combination of stocks, bonds, and money market/stable value funds is a time-tested strategy for managing risk and may even help improve returns over the long term. Diversification works this way: When one asset class -- stocks, for example -- loses value, another asset class, such as bonds or cash alternatives, may deliver positive returns that can help offset those losses.

Moreover, you can achieve an additional level of diversification by investing in subgroups within asset classes. Stocks, for example, have many different categories: domestic, international, large capitalization, medium capitalization, and small capitalization. There are also stock mutual funds that invest in specific sectors of the economy, such as health care and telecommunications. However, diversification does not ensure a profit or protect against losses in a declining market.

Focus on the Long Term

When the market is volatile and unsettled, it's important to remember why you are investing in the first place. Your long-term investment goals may include retirement, buying a second home, or paying for college for your children. Historically, long-term investors who have stayed calm and remained invested have done better than investors who let their emotions rule their actions and jumped in and out of the market during declines. See the chart for what can happen when you miss the market's best-performing months.

Missing Top-Performing Months in the Stock Market

Annualized Index Return / Potential Value of $1,000

Activity
30-Year Period (1989-2018)
20-Year Period (1999-2018)
10-Year Period (2009-2018)
Staying Invested
9.97% / $17,306
5.62% / $2,985
13.12% / $3,430
Missing Top 5 Months
8.19% / $10,604
3.23% / $1,887
8.19% / $2,197
Missing Top 10 Months
6.68% / $6,959
1.22% / $1,274
4.68% / $1,580
Missing Top 15 Months
5.33% / $4,746
-0.45% / $914
1.84% / $1,201
Missing Top 20 Months
4.09% / $3,328
-1.89% / $683
-0.43% / $958
Source: ChartSource®, DST Systems, Inc. Stocks are represented by Standard & Poor's Composite Index of 500 stocks, an unmanaged

Dollar-Cost Average

With dollar-cost averaging, you invest a fixed amount of money on a regular schedule in shares of a stock or a mutual fund. When share prices fall, the fixed amount you invest on schedule buys more shares. You are essentially taking advantage of a "sale" on securities when you continue adding money to your investment account on a regular schedule during times when prices are lower.
 
Source/Disclaimer:

Investing in mutual funds involves risk, including loss of principal. Mutual funds are offered and sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. For more complete information about any mutual fund, including risks, charges and expenses, please contact your financial professional to obtain a prospectus. The prospectus contains this and other information. Read it carefully before you invest.

You could lose money by investing in a money market mutual fund (Fund). Although a Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. A Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in a Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. A Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

Dollar-cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares through periods of high and low prices. This plan does not assure a profit and does not protect against loss in any markets.


Required Attribution

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2019 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Brokerage and investment advisory services available through UnionBanc Investment Services LLC, an SEC-registered broker-dealer, investment adviser, member FINRA/SIPC, and subsidiary of MUFG Union Bank, N.A.: • Are NOT deposits or other obligations of, or guaranteed by, the Bank or any Bank affiliate • Are NOT insured by the FDIC or by any other federal government agency • Are subject to investment risks, including possible loss of the principal amount invested.

You’re leaving Union Bank

By clicking on the link below, you will leave the Union Bank website and enter a privately owned website created, operated, and maintained by another unaffiliated business. By linking to the website of this private business, Union Bank is not endorsing its products, services, or privacy or security policies. If you accept third-party goods or services advertised at our website, the third party may be able to identify that you have a relationship with us (for example, if the offer was made only through our site).

The information that this private business collects and maintains as a result of your visit to its Web site, and the manner in which it does so, may differ from the information that Union Bank collects and maintains. (Refer to the Privacy & Security section for privacy protections Union Bank provides to its Web site visitors). If you provide the business with information, its use of that inforation will be subject to that business's privacy policy. We recommend you review their information collection policy, or terms and conditions to fully understand what that business collects. We are not responsible for the information collection practices of the other Web sites that you visit and urge you to review their privacy policies before you provide them with any personally identifiable information.

If you wish to continue to the destination link, press Continue.