2022 is off to a rough start with markets wary of stubborn inflation, geopolitical risks, and the uncertainty surrounding the pace of interest rate increases. Although volatility has not been a stranger to investors, the swift one-month pullback of 10%+ in the S&P500 and Nasdaq100 has caught the attention of even the most seasoned investors. We recognize that even long-term investors may feel uneasy while they are in the midst of an unstable market. In times like these, we believe viewing the markets with longer-term ‘lenses’ is required to ensure emotion is not driving investment decisions. Below are some considerations to help guide investors through turbulent times.
Take a step back to filter out the noise
We will be the first to say that ‘hope’ is not a dependable strategy. At the same time, ‘panic’ does not make for a reliable strategy either. Making rash investment decisions in reaction to headlines can have consequences on your long-term goals. Selling core holdings with strong fundamentals that have fallen in sympathy with the rest of the market may be regrettable. After all, these are often the names that are first to recover. As hard as it may be, sometimes the best thing to do is nothing. Try to unplug, go out for a walk, or spend some time with friends to tune out the constant barrage of market updates. However, before you do this, make sure you know what you own and why you own it. Speak to your advisor to get an understanding of your holdings and whether any rebalancing is necessary.
Extend Your Perspective
Some investors look at the day-to-day movement in the markets, and this may cause them to lose sight of their portfolio achievements. As an example, even though the S&P500 has pulled back to start 2022, if one looks at the growth over the last 2 years, the recent events seem less ominous.
When taking a longer-term view of the markets, the resilience and ability of the markets to recover from downturns are evident. The chart below from RBC Capital Markets uses grey bars to indicate major drawdowns that coincided with economic recessions. These periods were gut-wrenching pullbacks, but their impact has been smoothed over time as economies and corporate earnings have historically found a way to recover.
Even Good Years Have Bad Days
Finally, as we have discussed in previous blogs, even winning years often have periods of negative drawdowns within. As per Fidelity research, since 1950, the S&P 500 has, on average, experienced a 5% pullback 3 times a year and a 10% correction once every 16 months. In the chart below one can see year-end returns for the market and the largest drawdown that occurred within the same year. For those with a longer investment horizon, these pullbacks have proven to be good opportunities for investors.
Your advisor is there for you. Speak to them to better understand the cause of market pullbacks and what they believe needs to change in order for the market to begin its’ recovery. Although no one can time the market precisely, investors should be equipped with an expectation of how the year could unfold. With some context of the risks being taken, future market expectations, and a review of your portfolio, investors can better decide what the best action is for themselves.