What does it mean when markets swing? Stock markets never move in a straight line—up or down. The wiggles they present on a daily basis are a form of volatility, as are the bigger drops or rallies we see around stock market corrections and bear markets. But being a common occurrence doesn’t make volatility any easier to weather, especially if you’re watching your portfolio value decline.
Still, before taking any action in an attempt to avoid volatility, you may find it helpful to take a step back and better understand what causes market volatility and how it may impact you if you have longer-term investment objectives.
Legendary investor Benjamin Graham gave us a helpful framework for thinking about how markets move: In the short term, markets are a voting machine—driven by investor sentiment—but in the long term, they are a weighing machine. Market fundamentals overpower in the long term, allowing stocks to rise over time. This is an important lesson for navigating volatility because it helps put into perspective how even scary, short-term gyrations even out over time. You don’t need to avoid downside volatility to achieve your long-term investing goals.
Read more about understanding market volatility here.
An example of the “voting machine” in action is your classic stock market correction—a steep, sentiment-driven market decline, usually between -10% and -20%. Corrections are common in bull markets, but can be emotionally tough to handle. They seemingly come out of nowhere and can happen for any or no reason whatsoever. They are also infamous for scaring investors into making emotional decisions, as markets quickly drop. But often the best course of action is to ride a correction out, as they usually end just as quickly as they begin.
Compare corrections to a bear market: a fundamentally driven market decline of -20% or greater that lasts for an extended period. If you are able to correctly identify a bear before the bulk of its decline arrives, you may find it worthwhile to try to sidestep some of the downside volatility. However, this is a risky endeavor. Your emotions may make you think any downside volatility is a bear market—potentially leading you to exit markets prematurely and miss out on future bull market returns you likely need to reach your long-term investing goals.
It is difficult to stay disciplined in a volatile global economy. Investors are humans and have a tendency to experience the pain of loss more acutely than the upside of gains. This feeling can lead to rash and emotional short-term decision making. Fisher Investments is committed to educating investors to guard against this behavior, so you have a better chance of staying disciplined and on track towards your long-term financial goals.
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