Tips for navigating stock market volatility

Robin Powell of the Evidence Based Investor & Jan-Carl Plagge of Vanguard share some tips for stock market volatility

RP: One of the temptations we face as investors is to try to time the stock market.

With the benefit of hindsight, it’s easy to see when, ideally, we should have bought, or when we should have sold.

The problem with market timing is that it’s very hard to do in practice. Not least because, in times of market volatility, market sentiment can change very quickly.

Here’s Jan-Carl Plagge – an investment analyst from Vanguard.

JP: When we look at the historical performance of pretty much any equity market around the world, we see lots of ups and downs, we see lots of peaks and troughs; and when we look at those, it’s of course very tempting to say, “well, had I sold around the peak and then just avoided the depreciation, and then re-entered somewhere around the trough, I would have done much better…” but our analyses and simulations show that it can happen quite quickly that we don’t get the timing right. And if we leave the market either too early, or re-enter the market too late, we can very quickly end up in a scenario where we significantly lag behind from a performance perspective compared to the performance that the buy-and-hold investor would have generated.

RP: So, when markets are volatile, the best approach is simply to sit tight.

But it’s not easy to do, especially if you’re feeling stressed or anxious.

Here’s a helpful tip.

JP: Good advice could be not to look at the portfolio and its performance too often, especially when markets are more turbulent. In fact, there are external studies out there that find that the more often investors look at their portfolios - especially in times of distress - the more anxious they become and the higher the premium they demand in order to stay invested.

It’s just better for investors not to look at their investment too often, as that might prevent them from selling out of their investment at the worst possible time, which it typically is, if investors leave the market after it drew down once we are in a period of distress.

RP: Something else that can help in a choppy market is to ignore the noise — to stop reading market commentary and avoid financial TV channels like CNBC.

It can also help to speak to your financial adviser — or, if you don’t yet have an adviser, to find one to keep you focused on your long-term goals.

JP: I think it’s important for advisers to be a voice of reason – to tell investors that volatility comes with the territory, that bear markets have always been there, and that it’s important not to panic in times of turbulence, in times of uncertainty, to stay the course.

RP: Finally, remember that market downturns are inevitable. And it’s precisely because equity markets are so uncertain that we can expect a healthy return for investing in them.