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Ask Sylvia: How Should I Think About This Market Volatility?

By Sylvia Kwan

It’s been quite a time for the markets over the past few weeks. Things can change very quickly in the stock market, and none of us has a crystal ball to tell us when (not even the ultra-confident talking heads on TV, believe me).

So what’s an investor to do? Spoiler alert: The answer, in most cases, is “nothing.” And here’s why.

Diversification matters

At Ellevest, you’re not just investing in stocks, or in any single asset class. Our experience tells us that the best way to protect against the unknown is a well-diversified investment portfolio, with a range of investments; in fact, you won’t find any portfolios on Ellevest.com with a 100% allocation to stocks. The investment portfolios we offer at Ellevest are diversified across stocks, bonds, and alternatives, depending on your goal.

For shorter-term goals, there’s a lower allocation to stocks to reduce the risk of a market downturn derailing you close to your goal date. For longer-term goals, there’s a higher allocation to stocks, because that may give you the time to make up market downturns, and to give you the opportunity to earn the higher returns that stocks have historically posted. Through all of this, market declines are normal and a necessary (but unfortunate) part of investing.

What investors did lately

On Monday, February 24, fears about the spreading coronavirus caused the S&P 500, the Nasdaq, and the Dow Jones Industrial Average to fall sharply, to the point that they had “given up their gains for 2020.” At one point, the Dow was down more than 1,000 points, its biggest drop since October 2018. On Thursday, February 26, the stock market officially dipped into “correction” territory — aka down 10% or more since its most recent record high.

Then, over the weekend of March 7, a political clash between Saudi Arabia and Russia caused a steep decline in oil prices, which — combined with further spread of the coronavirus — caused a panic in the stock markets. That led market “circuit breakers” — or automatic halts on trading that kick in when the markets decline by certain amounts — to pause trading for 15 minutes on Monday morning.

On Wednesday, March 10, the World Health Organization declared the coronavirus a “pandemic” (disease that’s spread across the world) and the Dow Jones Industrial Average slipped even further into “bear market” territory — meaning it dropped by 20% or more, while other markets came close. That night, President Trump implemented a travel ban from Europe and proposed some economic relief measures. But it wasn’t enough to quell concerns, because the markets dropped on Thursday morning and triggered the S&P’s circuit breaker, halting trading for 15 minutes again. Later, the Federal Reserve announced a plan to inject money into the bond markets, but the stock markets were down even further by the end of the day. The Dow fell by 10% (its biggest drop since 1987), the S&P 500 fell by 9.5%, and the NASDAQ fell by 9.4%.

Will the coronavirus continue to get worse? We certainly hope not, but we simply don’t know. We also don’t know with certainty the effect it might have on the global economy in the long term. We can look at how the markets performed after other viral outbreaks like the similar SARS, but the economic context has changed since then.

Putting this market volatility in context

The stock market doesn’t go straight up. In fact, historically speaking, stocks have had a roughly 53% chance of rising and a 47% chance of falling on any given day. We just don’t know which days those “given days” will be. That’s why we recommend investing steadily. If you had invested in the stock market from 1999 to 2018, and not touched it, your money would have tripled. But if you had traded in and out and had missed out on just the 10 best stock market days over that period — just 10 days — your returns would have only been half of that. People may think they should wait for a pullback to invest, but the data shows that historically, “time in the market beats timing the market.”

Even when volatility lasts for days, weeks, or months, it feels scary, but it disappears with a long-term view. We believe the way to weather periods of volatility is by building a resilient portfolio that’s diversified across different asset classes — which is what we do at Ellevest. Certain assets have weathered volatility better than others; those include assets with low correlation with the stock market, like municipal bonds and alternatives, and assets that generate cash flow, like dividend-paying stocks and bonds. That’s why these asset classes are in almost all of our recommended portfolios.

Lastly, it’s important to remember that returns come with risks. And investing in the stock market comes with the greatest risks — but historically, it has also had the best returns over long periods.

The bottom line about market drops

So the bottom line is this: Markets fluctuate over time, and one of the biggest mistakes investors make is trying to “time” the market by guessing when to buy or sell. Another big mistake they make is to “do something” (ie, sell) when markets decline, even over longer periods of time.

Instead, it is our view that one of the smartest things you can do is invest regularly — a bit out of each paycheck — into a low-cost, diversified investment portfolio. This can mean you’re buying in some markets that are higher and some that are lower, but that those may even out over time. We believe the most prudent course of action is to have a well-thought-out asset allocation and keep investing steadily.


Disclosures

© 2019 Ellevest, Inc. All Rights Reserved.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

The practice of investing a fixed dollar amount on a regular basis does not ensure a profit and does not protect against loss in declining markets. It involves continuous investing regardless of fluctuating price levels. Investors should consider their ability to continue investing through periods of fluctuating market conditions.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

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Sylvia Kwan

Sylvia is the Chief Investment Officer of Ellevest. She researches and oversees Ellevest portfolios and develops the algorithms behind Ellevest’s investment recommendations.