Financial markets have had a difficult start this year. What is the cause of this volatility? And does it present opportunities for patient investors?
First, several factors explain market volatility, including the war in Ukraine, rising inflation, rising interest rates and the lingering effects of the COVID-19 pandemic. However, while these factors may be specific to the recent market decline, volatility itself is a common feature of the investment environment. In fact, history shows that corrections of 10% or more occur approximately every year and declines of 15% or more occur on average every two years. Additionally, while 2022 has so far been challenging for investors, it was preceded by a long period of strong markets, with the S&P 500 averaging a return of more than 20% over the past three years.
Knowing the typical frequency of market volatility and reviewing past years’ results can make the current situation less shocking. But you don’t just have to “ride out” the downturn, because a bear market can give you the opportunity to buy more investment stocks at a good price. Specifically, you can expand your holdings in companies that have good growth prospects through strong management and products or services that provide sustainable competitive advantages. And this type of opportunity is important, because one of the keys to building wealth is to increase the number of shares you hold in your various investments and hold them for the long term. While the market will always fluctuate, the long-term trend has been positive, especially for well-diversified portfolios built with quality investments.
Of course, while it’s a good idea to increase your shareholding at bargain prices, you still want to be strategic about it, rather than just buying what seems like the biggest deal. By reviewing your existing portfolio, can you identify any gaps that could be filled with new investments? Are there opportunities to further diversify your holdings? By holding different types of stocks, bonds, government securities and other investments, you can help reduce the impact of volatility on your portfolio. (Keep in mind, however, that diversification cannot guarantee profits or prevent losses in falling markets.) – term objectives. You can also consider setting up a systematic investment program where you invest the same amounts in the same investments on a regular basis, such as monthly. When prices go down, you automatically buy more shares, and when prices go up, you buy fewer shares. (However, systematic investing does not guarantee a profit or protect against loss, and you will need to be prepared to continue investing when stock prices fall.)
Prior to this year, average annual returns had been strong for about a decade, which made it quite easy to overlook normal market volatility and may have led to overly optimistic performance expectations. So it wouldn’t be surprising if your initial reaction to the current downturn is concerning. But by viewing the current investment environment as an opportunity to add quality investments at attractive prices, you can help yourself develop a behavior that can serve you well throughout your life as an investor.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones. SIPC member. Past performance of the markets is no guarantee of how they will behave in the future. Investors should understand the risks of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors may lose some or all of their capital.