The Toughest Questions about Market Turmoil: Answers from a Financial Advisor
As a financial advisor in Houston, some of the top questions we’re asked are about the stock market. We get it – watching your investments lose value can be devasting, even if it’s just on paper. However, here is what is important to know:
Stock market volatility is a fact of life. There will always be ups, and there will always be downs. No one can predict the future. However, there is no need to panic.
If you are concerned about market volatility, talk to a financial advisor who understands it. Revisit your long-term goals. Discuss different what-if scenarios. Explore worst-case scenarios and best-case scenarios. If you’re taking more risk in your portfolio than you’re comfortable with, adjust it to address your concerns and potentially mitigate these risks with the help of the fiduciary advice of your advisor.
At Linscomb & Williams, our team of financial advisors in Houston, TX; Atlanta, GA; and Birmingham, AL; and Huntsville, AL have been helping investors build their wealth for more than 50 years. In this time, we’ve seen markets rise, and we’ve seen markets fall. We’ve also answered a lot of questions.
Here are some of the most common questions we are asked about the market.
What Actually Causes Market Volatility?
When you own stock, you own equity in a company.
There are times when the broad market averages, such as the Dow Jones Industrial Average (DJIA) or the Standard & Poor’s 500, fall collectively because of some macroeconomic or other unusual challenges facing many companies across the entire economy. Individual stocks can also face choppy waters due to factors specific to them or within their sector. There are even seasonal factors that often impact the market. Frankly, a market drop can also simply occur because of investor panic, yet the underlying trigger-events creating the anxiety among the masses are always different.
If you’re uncomfortable with the market and fear its impact on your investments, talk to a financial advisor to understand why it’s happening before making an emotionally-based decision.
Don't panic. Talk to the fiduciary financial advisors at Linscomb & Williams to see how we can help.
Prices are Falling! Should I Sell?
At some point in the future, prices will fall. When that happens, should you sell?
To answer this question, it takes a good look at your long-term goals. Many times, stocks usually recoup their losses over the long term. There has never been a case for broad-based declines in the stock market where this has not been true. Selling in a panic can be imprudent because if the loss is transitory, you’ve lost the chance to recover any losses while watching the stock and markets resume their usual long-term growth.
On the other hand, some stocks perform poorly because the company or sector isn’t doing well due to problems with a product, company management, or changing consumer tastes. In that case, dropping the stock from your portfolio could be a wise decision.
If you start to feel anxious about portfolio losses, remember you haven’t actually lost anything tangible until you actually sell and realize the losses. Only when you sell, you end up locking in those losses and potentially missing out on potential recovery if you wait too long to reinvest. Reinvesting after selling can be very difficult if you miss out on re-entering the market at a lower point than where you sold.
When stock prices are falling, it certainly feels like they can go to zero. History, however, also shows us that has never happened on any broad-based decline in stock values.
If you’re unsure, discuss your fears with a financial advisor. Oftentimes, there are hidden opportunities in a market downturn, such as lower prices. A financial advisor can also help you move past unnecessary fears. For example, if you’re well-diversified, it’s not reasonable to think that entire swaths of U.S. companies are suddenly going to go out of business and go bankrupt, causing investors to lose everything. Have a discussion with a financial advisor you trust. A little information can go a long way.
How Long will Market Turmoil Last? What’s the Normal Recovery Process?
In the U.S., stock market declines have historically been followed by recovery. But periods of decline and recovery have varied in length.
For example, after the stock market crash of 1929, the market didn’t fully jumpstart again until after World War II, while the economic expansion that followed was sustained and long-lasting for decades. On the other hand, the stock market decline of 2008 (which took more than a third of the S&P 500’s value) was recouped in about two years, and the market moved higher from there.
The key is tuning out the noise!
Everyone seems to have an opinion about the market, from radio talk-show hosts to your friends and family members. However, opinions are not facts. Reacting out of fear can have a lasting impact, while losses experienced near retirement can be even more devastating. When you’re still working, you may have several options and a longer time horizon to adapt, although many of these opportunities go away once you’re retired.
It’s important for investors to rely on discipline, not emotion when the markets are volatile. Instead of reacting to the day-to-day volatility of the market and the often-inconsistent reports by the media, remember the long-term nature of your needs and strategy.
Remember your reason for investing, and discuss your fears with a fiduciary financial advisor whom you can trust.