Navigating Volatile Markets
5 tips for keeping your cool during market gyrations
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1. Take the broad view: downturns are normal
Market downturns happen every so often for various reasons. Over the short term, volatility – which can cause dramatic price swings – might be difficult to accept. The fact remains that over the long-term, stock markets have recovered and outperformed other assets classes. Since 1932, we’ve experienced bear markets every five years or so, with downturns averaging losses of about -40%.1
Past performance is no guarantee of future results. This chart is for illustrative purposes only and does not represent the performance of any particular investment. A bear market decline is defined as a -20% drawdown from peak to low. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges.
1 Smith, Anne Kates; Burrows, Dan. 8 Facts Your Need to Know About Bear Markets. Kiplinger, May 4, 2020. https://www.kiplinger.com/slideshow/investing/t052-s001-8-facts-you-need-to-know-about-bear-markets/index.html
2. Make a plan and stick with it
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3. Don't try to time the market
Many investors believe they can time the market correctly – taking money out of a fund when its value goes down and then investing again when the value starts climbing up again. This sounds good in theory but usually does not turn out well. Often, the timing isn’t perfect, and investors sell when the price falls, but then end up reinvesting at a price higher than when they sold. This can hurt your long-term wealth creation momentum. The old adage “it’s time in the market, not timing the market” sticks around for a reason.
This chart assumes shares were sold at the closing price the day before a “best” day and bought back at the close of the best day, effectively removing the returns generated that day. Index returns do not reflect any fees, expenses, or sales charges. Investors cannot invest directly in an index.
4. Dollar-cost averaging
An additional strategy many investors use is dollar-cost averaging – when you invest your money in equal portions at regular intervals, regardless of the ups and downs in the market. It would be great if we could buy stocks, or other types of investments, when the market is low and sell when the market is high. Unfortunately, efforts to time the market often backfire, and investors end up buying and selling at the wrong time. When stocks go down, people often get fearful and sell. Then, when the market goes back up, they might miss out on potential gains. On the flip side, when the stock market goes up, investors might be tempted to rush in. But they could end up buying just as stocks are about to drop.
Dollar-cost averaging can help take the emotion out of investing. It compels you to continue investing the same (or roughly the same) amount regardless of the market’s fluctuations, potentially helping you avoid the temptation to time the market. When you dollar-cost average, you buy more shares of an investment when the share price is low and fewer shares when the share price is high. This can result in paying a lower average price per share over time. And by wading in, as opposed to handing over your money all at once, dollar-cost averaging can help you limit your losses in the event the market declines.
Example: $500 monthly investment
|Month||Monthly Investment||Share Price||Shares Purchased Each Month|
This table is for illustrative purposes only. Dollar Cost Averaging does not assure a profit or protect against loss in declining markets. Investors should consider their ability to make regular investments during all market conditions.
AVERAGE SHARE PRICE: $10.00 ($60.00/6 purchases)
AVERAGE SHARE COST: $9.77 ($3,000/307.1)
The average cost of your shares would be $0.23 less than the average price of your shares over that period.
5. Diversify, because winners alternate
The chart below demonstrates the need for a diversified asset allocation plan - it shows how various asset classes performed on a year-by-year basis over the last 15 years. The best-performing asset class for each calendar year is at the top of each column.
No asset class has consistently had the best return year in and year out. For example, emerging market stocks. If you invested in 2007, 2012, or 2017 you’d have done fairly well those years. But what if you had put all of your money into emerging market stocks in 2008, 2011, or 2015? You wouldn’t have done so well those years.
Past performance is no guarantee of future results. This chart is for demonstration purposes only and does not represent the performance of any specific investment. Large growth stocks are represented by the S&P Growth Index; Large value stocks are represented by the S&P 500 Value Index; Small growth stocks are represented by the Russell 2000 Growth Index; Small Value stocks are represented by the Russell 2000 Value Index; Foreign stocks are represented by the MSCI EAFE Index; Bonds are represented by the Bloomberg Barclays US Aggregate Index; High yield bonds are represented by the Credit Suisse High Yield Index; Emerging market stocks are represented by the MSCI Emerging Markets Index; Global bonds are represented by the FTSE World Government Bond Index; Hedge Strategies are represented by the HFRX Global Hedge Index. Diversification does not guarantee a profit or a protect against loss in a declining market. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges.