How to Invest in Volatile Times (Hint: It's Not About Timing the Market)

On February 14, 2020, the S&P 500 Index (“the S&P”) ended the day at a record high of 3,386 as recorded by Yahoo Finance. But fear sparked by the Coronavirus Disease (COVID-19) and the impact on the global economy led to selling in the market and the S&P ended the month at 2,978. A drop, or "a correction" of over 12%. Scary to see for sure and no one knows whether this trend will continue or whether the markets will start going up again in the near term.

During times of uncertainty, no matter the reasons, even the most diligent savers and investors question their decisions when it comes to putting their money in the stock and bond markets (“the markets”).

Money management is not necessarily about setting it and forgetting it.

It is always healthy to revisit why you made important financial decisions; to check and make sure they remain relevant. But revisiting decisions does not mean changing them or taking drastic measures.

Let’s touch on some basic truths. ‍

Headlines and breaking news are designed to attract eyeballs and sell advertising.
These stories do not help you make informed decisions about what you should be doing with your money.

The markets always go up and down and sometimes can even stay flat for a while.
No one knows what tomorrow will bring. It is never a straight line from point A to point B. There are going to be many twists, turns, ups, and downs.

Does it mean we take all our money and run for the hills?

We don’t think so. We are all on our own financial journeys and ensuring we have a well thought out plan for that journey is one of the most effective ways to weather the storms that may come up. And while others may be running for cover we might even be able to take advantage of opportunities that emerge from the volatility.

Our recommendation is don’t panic, talk to someone you trust, and stay the course.

Here’s why: First, let's put what we have seen this past week in perspective. Examining disruptions over the last several decades and how the markets have reacted can help.

In October 2007 the S&P hit a high of over 1,500 before what is now referred to as the Great Recession rolled over on us and wreaked havoc on the housing market. In subsequent years foreclosures soared and whole industries needed federal bailouts. To be sure it was one of the worst economic periods in our history since the Great Depression in the late 1920s and 1930s.

The headlines and breaking news were almost unbearable. The market dropped to just over 720 in March before it began its recovery in January 2009. That was beyond frightening to people at the time. But by January of 2013, the S&P was back at that 1,500 level. And today, even with the coronavirus scare the same index is over 2,900. 

The point is from the depths of despair in 2009 the “markets” recovered and if you had sold in 2009, as many did, you would have suffered the loss and not participated in the recovery. This pattern repeats itself over and over again and while the past is no guarantee of the future, one cannot deny a pattern presents itself.

With the majority of our wealth earmarked for longer-term goals, it’s important to keep these movements in perspective and look at how markets have performed over longer periods of time such as the last 5 or even 10 years instead of focusing on weekly dips or peaks. 

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Data Source: https://finance.yahoo.com/

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While what happened in the past does not guarantee what will happen in the future, what is certain is that volatility is an ever-present part of the markets.

So what do we do about our investments?

‍Because we can't time the market and know exactly when it will go up or down the best way to build an investment portfolio is to do it over time making regularly scheduled deposits. And the best way to do that is through systematic investing.

‍Systematic investing is when you save regularly over time to take advantage of movements in the market that are bound to occur.

The power of systematic investing is that by regularly investing a fixed amount over time your investment buys more when the markets are lower and less when the markets are higher resulting in an overall reduced average cost per dollar. This is called dollar-cost averaging and it insulates you from speculating on when markets go up or down. Systematic investing based on a financial plan and goals lets you take advantage of spending time in the market rather than guessing how to time the market. Study after study shows this is crucial to a successful investment outcome.

Even if you selected the worst day each year to invest (the high), if you continued investing over the past 20 years you would still come out ahead.

It is important to note that systematic investing doesn't guarantee that you will profit from your investments nor does it protect against a loss but it does show how timing the markets (or failing to) isn’t the path to long term success.

At Farther we believe in the power of systematic investing.

Farther makes it easy to systematically invest by offering to constantly monitor your bank balance and invest the excess cash or allowing you to decide on a recurring contribution from your bank account. Either will then be automatically invested into the portfolios set up to match your financial goals. 

We also provide dedicated advisors who can work with you on mapping out your financial journey and goals so that you can be confident no matter what storms the market is weathering you can keep on your path and go farther.

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