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about market volatility
Over the past several weeks, global stock markets have experienced notable volatility. As you’re aware, in order to successfully navigate peak periods of volatility, investors need to be equipped with a proper perspective and a portfolio outfitted to weather the market’s ups and downs.
As you have discussions with clients, keep in mind market corrections are a healthy, constructive and common process, particularly after a long period of strong growth. This activity will cool much of the speculation that has driven markets up, and reduce excesses. The following points can be used to inform your discussions with clients.
- Focus on the big picture.
Despite the challenges of market volatility, the overall long-term direction of the market tends to be up. The longer an investor remains invested, the lower their overall risk and the greater their potential for positive returns.
Markets have experienced corrections many times throughout history. Further, periods of high volatility eventually give way to a more moderate regime of price fluctuations—particularly over the long-term.
Volatility is always most prevalent over shorter time frames, but substantially reduced over longer time periods. As an example, one year holding periods in the S&/TSX show a range of returns as high as 87% and as low as – 39.2%, a range of over 126%. Over time, that range of returns is significantly narrowed. For example, over thirty years, that range tightens to a mere 4.4% with a high of 12.7% and a low of 8.3%.
Being out of the market can present a very real risk to wealth creation over time. For example, by missing less than 1% of the best trading days on the S& 500 (from the beginning of 1977 to the end of 2005), an investor stood to lose over 90% of the potential return. Most investors who try to time the market only end up selling when prices are low, and miss out on profits when the market recovers. Investors who maintain a healthy perspective about market volatility and don’t lose sight of their long-term goals, stand to gain over time. |
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