Market Volitility
- BUY OR SELL?
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.
Although market volatility may be unnerving to novice
and experienced investors alike, these kinds of
corrections are nothing new, and are common market
phenomenon. The best approach to handling these worrisome
periods is to arm yourself with proven historical
investment information.
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 as the 1990 Kuwait crisis can have a
significant impact on world markets. 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 Impact 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 the think of them as opportunities to review your
exposure to risk.
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 investment 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.
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