Four Things to Remember During Volatile Markets
Written by Ryan Anderson, Private Wealth Advisor, and Blake Mankin, Financial Planner, in Blue Trust’s Houston, Texas office
When stock markets are dropping, we may feel our anxiety rising. This response is common and understandable. If the stock tickers are flashing red, the headlines are screaming bad news, and the world feels particularly unstable, then it is only natural to seek safety quickly.
Besides the financial markets, there are other circumstances when we experience this pressing urgency to react:
- If we see someone fall, then we move towards them quickly to help them.
- If a fire is reported in our building, we exit the premises right away.
- If we witness a crime or feel threatened, we immediately call the police.
In these scenarios, the innate reaction to perceived danger is to act as soon as possible. However, the financial markets require a different framework that often contradicts our natural response to fear.
Seeing images of horrified stock traders on Wall Street can create a sense of panic similar to hearing the smoke alarm go off in a smoky house. We feel the need to do something and do it quickly. The voice in our head grows louder, yelling at us to run away and bring all of our investments with us. “It might result in a loss,” the voice says, “but the house is on fire, and you need to get out while you still can!”
This panicked voice in our head might seem reasonable, but it does not usually give prudent advice. As we navigate the current volatile markets and possibly feel conflicted about how to move forward, here are four truths to keep in mind.
God is in control.
Our security is not ultimately found in money. First Timothy 6:17 says, “Instruct those who are rich in the present age not to be conceited and not to put their hope in the uncertainty of wealth, but in God, who richly provides all things for us to enjoy.” Market volatility can remind us that the accumulation of money is not our primary goal in life. Our ultimate hope is in God. He is in control and working for the good of those who love Him through every season (Romans 8:28).
When the markets are fluctuating, remember to lean on God’s constant presence: “Cast all your anxiety on him because he cares for us” (1 Peter 5:7).
Contentment is not determined by the markets.
In Philippians 4:12-13, Paul writes: “I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want. I can do all this through him who gives me strength.”
In periods of economic boom, as well as economic decline, the source of our identity and self-worth comes from the Lord. Material possessions and personal wealth do not lead to eternal contentment. Attaching our joy and contentment to the markets often leads to personal turbulence. A decline in the market can increase your dependence on God, rather than wealth, as it reminds you that money is simply a tool.
An impulsive decision can have long-term implications.
The impulse to quickly exit a turbulent market is a common emotional response to fear and uncertainty. Getting out can even feel like the only option. Unfortunately, this retreat is historically when many investors damage their long-term trajectory toward financial independence. It is important to take a step back, take a deep breath, and consider the facts.
Since 1920, U.S. equities have never had a negative 15-year annualized return. Although we know that past performance does not dictate future results, history does show us that short-term turbulence in the market usually levels out over time. Therefore, the discerning, but often difficult, response to a volatile market is not to get out as quickly as possible, but rather to move through it–patiently waiting for the financial shock of the present to recover.
Risk of Stock Market Losses Over Time
Source: FactSet; Total Return – S&P 500 calendar returns. Data as of 12/31/21
Recent research quantified how difficult it is to time the market and some of the potential consequences of selling at the wrong time. “Looking at data going back to 1930, the firm found that if an investor missed the S&P 500’s 10 best days each decade, the total return would stand at 28%. If, on the other hand, the investor held steady through the ups and downs, the return would have been 17,715%.”1
What is the key takeaway from this study? Be wary of making a hasty decision to sell when things are declining because it may have long-term implications for your financial situation.
We’ve been here before, and we’ve made it through.
None of us can predict the future, but we do know the future has challenges waiting for us. When we are in a particularly difficult investment season, it can feel uniquely devastating economically. This sense of fatalism can push us to want to exit the markets assuming that a recovery from the drop feels impossible.
Consider the following chart, however. Major, cataclysmic events are noted at different points along the graph. If you were to check the papers or news during the months, or even years in some cases, surrounding these events, you would probably have felt a dreadful sense of pending economic doom. For many people, the economic realities during these times did create significant hardship and suffering. However, a long-term perspective allows us to view these events as blips in the larger economic story.
Dollar Growth Across Asset Classes (1/1/1926 – 12/31/2021)
Indices used: Treasury Bills – 2005-Present: Citigroup T-Bill 3-month Index, prior to 2005:” Ibbotson Associates, Stocks, Bonds, Bills, and Inflation 2005 Yearbook”; Inflation – 2005-Present: Consumer Price Index, prior to 2005: “ Ibbotson Associates, Stocks, Bonds, Bills, and Inflation 2005 Yearbook”; Stocks – 2005-Present: S&P 500, previous information: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation 2005 Yearbook; Gold – 1978-Present: S&P GSCI Gold Index, prior to 1978: Bloomberg Gold Spot Price; Bonds – 2005-Present: Barclays Aggregate Bond Index, prior to 2005: Ibbotson’s intermediate-government bonds: ” Ibbotson Associates, Stocks, Bonds, Bills, and Inflation 2005 Yearbook. Chart based on monthly total returns. Past performance does not indicate future results.
In conclusion, when markets are volatile, you may want to grab your investments and run as fast as you can to minimize your losses. We encourage you to instead, pause, remember God is in control, and realize that patience is often your best solution.
Having a financial advisor who walks beside you with a long-term, diversified strategy can also help you avoid making rash decisions in times of crisis. If you’d like to discuss having a diversified strategy in place for your investments, please contact us at 800.987.2987 or email blog@bluetrust.com.
Scripture quotations taken from the (NASB®) New American Standard Bible®, Copyright © 1960, 1971, 1977, 1995, 2020 by The Lockman Foundation. Used by permission. All rights reserved. www.lockman.org
Scripture taken from The Holy Bible, NEW INTERNATIONAL VERSION®, NIV® Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.® Used by permission. All rights reserved worldwide.
While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.
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