When the market dropped 10% at the beginning of February, it was the first time in two and half years that a drop of such magnitude happened. The weeks that have followed have brought continued volatility.
Losing money, even on paper, is painful. Some investors are able to shrug off the pain with the understanding that volatility, corrections, and bear markets are inevitable components of long-term growth. For others, the pain of paper losses is so severe that they make drastic changes to their portfolio in reaction to volatility, triggering real losses that can have a tangible impact on long-term outcomes.
This continuing volatility offers investors an opportunity to check their appetite for risk by asking themselves:
“How did I react to the movement my portfolio experienced?”
“How might I respond differently if my portfolio were exposed to more risk? Less risk?”
“Would an even larger downturn cause me to abandon my strategy?”
The answers to these questions provide important information about whether a portfolio is appropriately aligned with an investor’s comfort with risk. Answers to these questions may suggest that an investor should dial back some portfolio risk to give them the peace of mind that will allow them to stay the course in the face of even greater market volatility. Sticking with an investment strategy through market downturns is a critical determinant of long-term success.
Ups and downs in the market are much more “normal” than the linear upward trend we have witnessed over the last several years. More volatility is ahead. Is your portfolio positioned such that you can shrug it off as an expected part of your long-term strategy?