Volatility, or dramatic price swings, can hurt long-term investors by drawing down portfolio values and forcing investors to extend the time horizon required to meet their financial goals. Volatility may also tempt investors to sell holdings precisely at the point valuations are becoming more attractive.Volatility, or market turmoil, may tempt you to change your long-term target allocation. Investors sometimes believe they can protect themselves by selling
equities in a downturn.
Typically, however, downturns tend to be short-lived.
Attempting to time the market as an emotional response may result in lower
returns for the average investor over time.Nearly half (46%) of investors say market volatility makes their lives stressful
Volatility-management strategies attempt to alleviate that stress by smoothing out
returns — they may not participate in the market’s highest peaks, but may have
lower risk, as measured by standard deviation, during down markets.
The good news? There is evidence strategies to manage volatility may reduce risk
without sacrificing a great deal of return. For instance, an investor who added 40%
U.S. bonds to an all-stock portfolio, one simple volatility-management technique,
over the past 10 years would have experienced 39% less volatility while giving up
only 33% of return. Purchasing the S&P 500®’s lowest volatility components,
another volatility-management tool, also produced almost 21% less volatility while
giving up only 13% of return.2
Sign up to download Worried about Volatility?
