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5 Reminders for Investors When Markets are Volatile

As we roll into the third year of the COVID-19 pandemic, January 2022 has seen a high level of market volatility. And, whenever the volatility is elevated, investors often get concerned and ask questions about how to deal with it.

While we can never know exactly what the markets will do, there are some ways to stay calm during market downturns and avoid making wrong decisions. Here are five questions you might be asking about market volatility.

Q: Why is the market volatile?

We’ve seen three consecutive years of double-digit returns for the Standard & Poor's 500 (S&P 500), which has happened only nine times since 1926.

If we can learn anything from past experience, the markets cannot continue to deliver this kind of return year after year, especially when the global economy is still grappling with the COVID-19 pandemic. Uncertainty brings volatility, and we still have considerable uncertainty for many reasons: the emergence of new COVID variants, lingering inflation with Consumer Price Index hitting 7% last December, labor shortages, supply chain problems, and when and how frequently the Federal Reserve Bank will raise interest rates.

Q: Should we be concerned about this high volatility?

This volatility could result in a market correction, meaning the markets may decline after a recent peak. A technical correction like this can happen when there’s been an atypical market rally based on investors’ hope and government support—like the high returns the markets have delivered in the last couple of years driven by monetary stimulus waves and the excitement that the pandemic might soon be behind us as vaccines are distributed.

We can be less concerned about market volatility from corrections, which are expected to be short-lived, than sustained market drawdown during economic recessions or any market events associated with geopolitical risk or systemic deficiency.

Q: What’s happening?

Last year, the economy grew around 6%, which is unprecedented and the fastest pace since 1980, especially considering the pandemic and a decreased level of economic activity. People have adapted to living with the COVID-19 pandemic, and our concerns are shifting. Market participants are now concerned about the Fed raising interest rates in 2022.

Remember, we have been living in an artificially low-interest-rate environment since the Great Financial Crisis in 2008, and the rate was lowered in March 2020 in response to the global health crisis. The central banks have been trying to stimulate economic growth with lower rates or lower financing costs, encouraging borrowing and investing.

Since the beginning of the pandemic, the Fed’s actions—including buying bonds and keeping interest rates ultra-low—have been commendable. As the pandemic eases and the U.S. economy gets its strength back, these additional supports will likely no longer be needed. However, with inflation still rising, the timing of removing the Fed’s monetary policy support is causing concerns in the financial market.

Market participants are particularly concerned that the Fed could raise rates too soon and too frequently. The Fed is aware of the economic environment, and I do not believe that the Fed will press on the gas too soon if the economic climate is not appropriate or conducive to rising rates.

Q: What else can we learn from the past?

If we look back at the S&P 500 Index since 1980, it has delivered 32 out of 42 years of positive returns despite intra-year volatility with average drops of 14%.

Month over month, we may see volatility ahead, but the index can still deliver a positive return. Historically speaking, it’s unlikely that we’ll continue to see double-digit returns year after year. It’s far more likely that we will see a normalized return in 2022, although unclear if it will be positive or negative.

From an economic standpoint, the Organisation for Economic Co-operation and Development estimates that economic growth is going to be around 4.4%. That is still above the historical average of 3.5%. So, we are not living in an economic recession when volatility is likely to sustain, dragging the markets to an extremely low level. That is not the current environment.

Q: What should I do?

Now is not the time to make hasty decisions about your investments. I often remind people that time in the market beats timing the market. Market timers believe they can outsmart the market by buying low and selling high, but the implicit and explicit costs of market timing can outweigh the benefits. Studies suggest that staying the course is the way to go, as long as the fundamental tenets of investing are in place with appropriate asset allocation matching with risk tolerance and time horizon of an investor.

For example, last year, we rebalanced our OneDigital target-risk portfolios. If you’ve rebalanced around the same time, you can have peace of mind that those models are carrying the appropriate levels of risk that match your risk tolerance (e.g. conservative, moderate, growth, or aggressive growth).

And, if your portfolio has not been rebalanced, then you might consider rebalancing now to ensure it’s at an appropriate level. We recommend that your portfolio rebalancing aligns with when the models are rebalanced by the portfolio managers.

Most importantly, I would encourage you to stay calm during tumultuous times. It’s very difficult to time the market when day traders are trading to make a profit—it’s not an appropriate time to adjust your portfolios because it carries the risk of whipsaw with sudden price movements and unanticipated reversals.

If you’re wondering how to protect your retirement savings, check out Market Volatility and Your Retirement Savings for a few tips to give you peace of mind when it comes to your financial wellbeing.

The materials and the information are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. If you are seeking investment advice or recommendations, please contact your financial professional.

Investment advice offered through OneDigital Investment Advisors, an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.

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