3 important reasons for staying invested through market downturns
It’s been a difficult year for investors so far. Inflation and political uncertainty have led to market volatility.
Market volatility can be scary, especially if the value of your investments drops, but it’s important not to let fear guide your decision about whether to stay invested in your portfolio. Here are three reassuring reasons for staying invested in the stock market during uncertain times.
1. The best financial decisions are not based on emotion
Emotions can play a big role in your financial decision-making if you aren’t vigilant. The thrill of seeing your investments increase in value can quickly be replaced with panic and fear when the value decreases during market slumps.
When you understand the cycle of emotions related to investing, you can reframe downturns as opportunities to maximise your returns in the long term. This is because when the value of investments falls, it becomes cheaper to buy more shares or fund units – providing greater opportunities to grow your wealth when conditions improve.
As Warren Buffett, one of the world’s most successful investors, famously said: you should aim to be “fearful when others are greedy, and greedy only when others are fearful”.
By looking at the situation objectively, without the influence of emotions, you will be able to make sensible financial decisions based on your understanding of how the markets tend to ebb and flow.
2. Bull markets tend to outlast bear markets
When markets are trending upwards and investments are generally growing in value, this is called a “bull market”. This is when you will often see your investments increasing in value. By contrast, a “bear market” describes periods when the market has dropped 20% or more from its peak. As seen in the chart below, bull markets have not only been more frequent over the past 60 years, but they have also tended to last far longer than the average bear market.
So, despite the rocky start for investors, it makes financial sense to be optimistic about the prospect of markets recovering sooner rather than later. As the markets recover, you could see significant increases in the value of your investments.
3. Staying invested could produce better long-term gains than moving to cash
Attempting to time the market by moving your investments into cash during market downturns could lead to significantly lower long-term returns than if you had stayed invested throughout.
The difference in returns is partly because the best days in the markets tend to occur immediately after a downturn. By attempting to time the market, you will often miss out on the significant returns generated on these important days. Compounding is the process of generating returns on the total value of your portfolio, including both your initial investment and any returns generated since then, so the impact of missing the best days in the market will be reflected in your portfolio’s value for many years.
Get in touch
If you’re concerned about whether the current market volatility will affect your long-term financial plans, seeking expert advice can help to reassure you and keep you on the right track. We can help you to decide on the most appropriate next steps based on your circumstances and future goals. Please get in touch to arrange a time to chat.
Please note: The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested. Past Performance is not a guide to future performance and should not be relied upon.