Reacting to Market Volatility

As COVID-19 continues to impact world markets, it helps to have some context to understand the nature of market volatility and decision-making strategies.

Let your strategy be your guide

When markets take a tumble it’s natural to be concerned about your investments. Corrections can be triggered by any number of issues including politics, financial concerns and, as experienced more recently, global health issues such as COVID-19. It can pay to remember that sticking to your investment strategy is usually the best way to respond to these situations.

Downturns through history

For good or bad, events that impact the market happen regularly. History demonstrates (again and again) that fluctuations, particularly those caused by global disease outbreaks, have very little effect on the market over the medium to long term.

 

The chart shows the performance of the MCSI World Index in relation to global epidemics that occurred between 1978 and 2019. Historically, market downswings occur in the middle of an epidemic and often last a short while as markets recoup their losses.

 

 

As you can see in the chart, over the past 42 years downturns are often short-lived. So, while it can be scary to be in the middle of a correction, it’s important to remember that it likely won’t last and eventually the market will self correct.

Responding to a downturn

One of the most common questions people ask during a market correction is what they should do with their holdings. The answer really depends on your overall investment strategy.

How you react to a downturn has a lot to do with your personal risk tolerance. If you’re risk-adverse, your first impulse may be to sell your investments and move to cash. Conversely, if you have a high-risk tolerance, you may be interested in adding to your investment portfolio. In either case, it’s important to know the difference between emotionally driven and strategically driven decision-making.

Before you take any action, a good rule of thumb is to ask yourself how the decision fits within your investment strategy and how it will help you accomplish your financial goals. If you can’t effectively answer both these questions, chances are it’s not the right decision for you.

Strategies to help you through volatility 

It can be challenging to separate your emotions from your finances, luckily there are a few easy things you can do to help you stay the course during market volatility:

  • Limit how often you check your portfolio. It’s unnerving to see the value of your portfolio go down, but checking it too often during a downturn could push you to make emotional decisions. So stay aware, but not hyper-vigilant, by establishing a weekly, monthly or quarterly portfolio review schedule – and sticking to it.
  • Think of the big picture. During a downturn focusing on short-term losses will only cause stress. Instead, try focusing on the long-term market trends and your ultimate financial goals.  This will help you keep things in perspective.
  • Remember the history. Downswings are part of the natural ebb and flow of the markets. The good news is that they are also historically short-term.

 

Before making any moves to your investment portfolio, we recommend that you speak to a Virtual Wealth Advisor at 1-844-622-4500 or email at support@virtualwealth.ca.


VirtualWealth is a trade name of Credential Qtrade Securities Inc. Member of the Canadian Investor Protection Fund. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds and other securities.