“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” – Sir John Templeton
If you’ve been paying any attention to recent market activity, you may very well be suffering from a bit of whiplash. News of a new Covid variant, disappointing job creation numbers and the possibility of a government shutdown all served to influence consecutive days of alternating 1% – 2% increases and decreases.
Historically, volatility can take the form of a stock market pullback, correction or even a crash. Loosely defined, a pullback is a market drop of 5% – 10% and takes a month or two to recover. Corrections are declines of 10% – 20% that can take several months to bottom out and several more months to recover. Most significantly, an outright market crash is a decline over 20% which can last several years before there’s a full recovery. Volatility in any one of these forms illustrates the importance of a long-term investment perspective as short term market turbulence becomes much more palatable when viewed through the lens of a 10-year investment time horizon.
This isn’t to say that an investor’s only alternative is to simply buckle up and enjoy the proverbial ride. In fact, market overreactions often create opportunity for strategic reaction. While the seemingly irrational and unpredictable nature of some of these recent fluctuations highlights the danger in trying to time the market, it does not preclude acting on predetermined investment principles during times of volatility. Volatility creates opportunities to position portfolios for better future returns through actions such as rebalancing accounts, harvesting losses to offset future gains, investing cash, and converting depreciated assets so they can recover in tax free accounts. Timing the absolute bottom of a market pullback, therefore, is less important than enacting principled investment strategies at opportune times.
The uncertainty brought on by market volatility is never comfortable, but it is definitely a normal phenomenon. The market will continue to go up and down, but it’s our choice whether we allow our emotions to go up and down with it.
