Investments and Market Volatility
Whenever there are indications that the market may be nearing or experiencing a downturn many investors are often tempted to make hasty decisions with regards to their mutual funds.
The temptation, of course, is to sell-off a portion of their funds, wait on the sidelines until the market has bottomed out, and then go back in when it’s safe. This anxiety is especially pronounced for newer investors who have less experience with market cycles, and how it can impact their mutual funds.
Although market volatility may be unnerving to novice and experienced investors alike, these kinds of corrections are nothing new, and are a common market phenomenon. The best approach to handling these worrisome periods is to arm yourself with proven historical investment information, and seek professional advice from an Investment Professional.
So let’s begin by taking a closer look at what causes market volatility. There are several factors that can impact market movement, and subsequently, the rise and fall in the value of the various types of mutual funds. Among the most common factors are corporate profitability, inflation and large scale events such as political and economic factors. Corporate profitability is the most obvious. When profits go up, the market goes up, and most types of mutual funds tend to benefit with corresponding growth. When profits decline, the market drops and the repercussion is felt on certain types of equity based mutual funds as well. Corporate profits are in turn impacted by global economic conditions which go through natural cycles of growth and recession. Also, equity mutual fund performance historically weakens during times of rapidly rising inflation, which drives up interest rates thereby making fixed-income mutual funds more attractive. Thirdly, unanticipated political occurrences such the 1990 Kuwait crisis can have a significant impact on world market. In that instance the Toronto Stock Exchange dropped rapidly from 3,000 to 2,200 points, effectively ending eight years of recovery from the 1981-82 recession.
How Drastically Does This Affect Mutual Funds?
Although these ups and downs can create tension and uneasiness among investors, when viewed from a long term perspective, their detriment to mutual funds is less dramatic than often feared. Historically, rises have followed shortly after steep falls in the market, and mutual funds resume an overall upward trend.
What is the Smartest Way to React During Market Volatility?
One thing is certain, trying to time the market by getting in and out during these periods does not make sense. This practice is termed “lightening up” but is rarely successful because no one can predict exactly when the drop will occur. And if investors sell, there is always the danger that they will miss out on any subsequent rise in the market. If investors had tried to time the ups and downs of the market, they would have risked missing out on days that registered some of the biggest gains. The smarter way to view volatile periods is to think of them as opportunities to review your exposure to risk, discussing it if necessary with your Investment Professional.
What Should Drive the Selection of Mutual Funds?
Smart Investment Professionals and investors select their mutual funds based on fundamental financial indicators rather than on short-term industry or market trends. A mutual fund manager is focused on balance sheets, cash flows, and earnings to reveal a company’s true potential for long-term growth. Your focus should be on the same indicators. Solid performance and corporate profits drive market performance in the long run.
What’s the Bottom Line on Market Volatility?
The world is an ever-changing place, and volatility along with the potential for higher returns is the nature of equity markets. Investors who maintain a long-term outlook for their investments have an advantage over those who do not. Successful long-term investors understand that the market will always experience periods of decline, and that although stock investments are considered riskier, history has shown that stocks have a record of outperforming more conservative investments over longer time periods. In the past, equity investments have offered the highest returns. The key to surviving market volatility is a long-term approach, diversification, and a comfort level with your exposure to risk. Talk to your Investment Professional to set your mind at ease if you find yourself worrying too much about your investments.
This article was prepared by Fidelity Investments for Andray Domise, Independent Financial Advisor, who is an Investment Professional with International Capital Management.
Read a fund’s prospectus and consult an investment professional before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated. Investors will pay management fees and expenses, may pay commissions or trailing commissions, and may experience a gain or loss.
Tags: asset allocation, Investments, Mutual Funds
This entry was posted on Wednesday, October 21st, 2009 at 9:21 am and is filed under Investments, Market Commentary, Mutual Funds. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
