In investing, the term “high volatility” describes large swings in value, to both the upside and downside, of securities (like stocks, bonds, mutual funds, etc.). Some investors may be tempted to exit the markets and their investments during times of high volatility because volatility can be stressful.
The problem is that investors who are on the sidelines may miss the best days. As the following chart shows, the cost of missing the best days can be dramatic. In fact, by missing only the top 50 days out of the 7,056 trading days in this example, a portfolio will actually decline in value because the remaining positive return days cannot make up for the worst days in the market. And if an investor just missed the 40 best days, they would make 7.3% less than someone who had stayed invested the entire time. Think about it: you could be invested on more than 99% of the best trading days and still lose money.
Don’t try timing the market
Instead of attempting to time the market by continually jumping in and out, focus on a long-term, well-diversified investment plan. Specifically, invest at regular intervals—and across markets, if possible—so you can avoid having to predict when the value of your investments will rise or fall, and to minimize dramatic fluctuations of the market. In financial terms, this investment approach is better known as dollar-cost averaging.
A great way to ensure you’re taking advantage of dollar-cost averaging is to set up a pre-authorized contribution (PAC) plan. A PAC automatically invests your money at regular periods and allows you to benefit from compounding returns, since you’re upholding your exposure in the market at all times, while continuously adding to your investment.
A financial advisor can help you stay disciplined and focused on a long-term plan, which can include a PAC plan that takes advantage of compounding returns.
Contact your MD Advisor to find out how we can help or learn more about MD's investments offering.