During periods of difficult market volatility – like the 2008 financial crisis, the coronavirus pandemic, etc. – it’s easy to feel unnerved, especially in the face of troubling portfolio losses.
Many investors find themselves asking if there’s anything they could have done differently, or signs they could have interpreted that might have given them a leg up.
It’s important that during periods of market upheaval, investors take a step back and look at the situation objectively. While you can’t control market conditions, you can control how you react to them; and how you react can go a long way toward your own financial well-being.
Start by taking stock of the situation
First things first, it helps to take a step back and put things in perspective. By its nature, market volatility is nearly impossible to predict. However, it’s important to remember downturns are a recurring function of markets, especially when viewed over the long-term.
After periods of sustained growth, it’s easy to lose sight of this fact. And while it might not make portfolio losses any more palatable, there’s often a silver lining to be found in the grey clouds of market volatility.
That’s because, historically speaking, most major drops have eventually been followed by a recovery. The record-setting bull market that followed the 2008 financial crisis is a great example of this. When put in a historical context, many of these drops look much less serious in hindsight.
Just like you can’t predict when volatility will strike, it’s just as difficult to predict when it will recede. However, historically, most market drops have been followed by a period of sustained recovery which investors have been able to capitalize upon. Therefore, it’s oftentimes best to stay the course as opposed to trying to time the markets.
Quicktip: For Those Under 50
If you’re investing for a long-term goal, like a retirement that might be 10, 15, or even 20 years down the road, then there’s some assurance to be found in the knowledge your portfolio has ample time to recover – and hopefully prosper – with the opportunity of a market rebound.
In the meantime…
It’s important to know you’re not helpless when it comes to your financial well-being. There are numerous steps you can take to help your finances weather the storm and help put you in a good position to benefit from the opportunity of a market rebound.
You may find it helpful to talk with an Advisor about your current financial plan, and to confirm it accurately reflects your needs and remains aligned with your goals, time horizon and tolerance for risk. This should help you to stay objective when making decisions about your portfolio.
And that objectivity is key. Because even as markets decline, they still tend to have positive days, and missing only a fraction of those days can have negative long-term consequences on your portfolio. The chart below demonstrates the risk of trying to time the markets by avoiding exposure.
Penalty for Missing the Market
Market timing is difficult – stay invested and use volatility to your advantage.
Table 1: 20-Year Daily Returns Ending 09/30/2024
| Period of Investment | Average Annual Return | Growth of Initial Investment of $10,000 |
|---|---|---|
| Fully Invested | 8.6% | $51,701 |
| Miss the 10 Best Days |
4.4% | $23,711 |
| Miss the 20 Best Days |
1.8% | $14,233 |
| Miss the 30 Best Days |
-0.3% | $9,353 |
| Miss the 40 Best Days |
-2.2% | $6,438 |
Source: Bloomberg LP, PNC
*This chart is provided for illustrative purposes only and does not reflect an actual investment. Investors cannot invest in an index.
While past performance is no guarantee of future results, you can see from the chart above that those investors who simply stayed the course and adhered to their long-term investment plans fared significantly better than those who did not.
To put this in another light, many investors continue to make contributions to their employer-based 401(k) accounts, for example, even during down market periods. That’s because when you have the benefit of time on your hands, making consistent contributions to your investment accounts – regardless of market conditions – can be a sensible way to help build wealth over the long-term.
Quicktip: For Those Under 50
When you have the benefit of time on your hands, making consistent contributions to your investment accounts – regardless of market conditions – may be a sensible way to help build wealth over the long-term.
Additional actions you can take
For those investors who want a more hands-on approach to the situation, there are other steps you can take to help promote the well-being of your portfolio:
Quicktip: For Those Over 50
When retirement is coming into focus or your investment time horizon is shorter – perhaps even only a handful of years away – it’s easy to let a sense of helplessness set in.
Consider the use of tactical products to help hedge your losses. If you’re nearing retirement and have less time on your hands to recoup losses, you may want to explore the use of certain tactical products that can be used to complement your core investments and may provide a certain degree of principal protection during a market downturn. A few of the more common options include equity-indexed annuities, buffered variable annuities and structured products.
Review your holdings for large or outsized risk exposures. Simply put, if your portfolio is overly weighted in any one area, you may want to consider diversifying your holdings to limit your exposure to any one sector or security. Diversification could also help reduce your overall risk exposure.
Consistently rebalance your portfolio. Remember, you want to make sure you’re diligently adhering to your long-term investment plan. Rebalancing helps to ensure that your investments align with your target asset allocation, as well as your short-term needs and long-term goals.[1]
Explore tax loss harvesting. Consider selling securities that have suffered a loss. Realized losses can be used to offset taxes on gains at a later date. This can become especially useful at the end of the year. You should consult with your tax advisor about your personal tax situation.
Review your emergency fund. With so much uncertainty in the markets and the economy, it may prove useful to revisit any emergency fund savings you might have to make sure they’re adequate and accessible.
Quicktip: For Those Under 50
Stay invested and don’t panic sell. As noted above, trying to time the market is nearly impossible. Even as markets suffer declines, they still tend to have positive days. By staying invested and refusing to sell assets in a panic, you can position yourself to capitalize on those positive days.
Here to help
At PNC Investments (PNCI), our focus is on your long-term financial well-being. During periods of economic uncertainty, PNCI Financial Advisors are here to help you make appropriate financial decisions. For more information on handling market volatility, or to discuss your personal financial situation in greater detail, contact us today. Simply dial 855-PNC-INVEST to get started.
