Dealing with volatile markets | Capital Group



Dealing with volatile markets

Swift and dramatic change can take a toll on investors. When markets falter, some may be inclined to reduce their exposure. Yet history shows that periods of turmoil and steep market declines have subsequently been among the best times to invest. Investing with a long-term view offers the reassuring power of perspective.


Market declines are part of investing

Markets periodically experience corrections that are inevitable, but they don’t last forever

Emotional investing can be hazardous

The actions taken during market volatility could lead to investment success or shortfall

Time in the market matters, not market timing
Historically, investors who have stayed the course over the long run have been rewarded

Market declines are part of investing

A look back at stock market history shows that declines have varied widely in intensity, length and frequency. In the midst of a decline, it’s been nearly impossible to tell the difference between a slight dip and a more prolonged correction.
Since 1970 there have been five periods of 20% or greater declines in the MSCI World Index. And while the average 37% decline of these cycles can be painful to endure, missing out on part of the average bull market’s 283% return could be even worse.
The much shorter duration of bear markets (15 months on average), is also a reason why trying to time investment decisions can be difficult and is usually ill-advised.

The downside looks less daunting with a long-term perspective 

Past results are not a guarantee of future results. For illustrative purposes only. Investors cannot invest directly in an index.

Data to 31 December 2019. MSCI World (gross dividends reinvested) in USD. Bear markets represent peak-to-trough price declines of 20% or more in the MSCI World Index. Bull markets reflect all other periods. Sources: Capital Group, MSCI

Emotional investing can be hazardous

Daniel Kahneman won his Nobel Prize in 2002 for his work in behavioural economics, a field that investigates how individuals make financial decisions. A key finding of behavioural economists is that people often act irrationally when making such choices.
Emotional reactions to market events are perfectly normal. Investors should expect to feel nervous when markets decline, but it’s the actions taken during such periods that can mean the difference between investment success and shortfall.
One way to encourage rational investment decision-making is to understand the fundamentals of behavioural economics. Recognising behavioural biases like loss aversion and herd mentality may help investors identify potential mistakes before they make them.

Time in the market matters, not market timing

Market corrections are not uncommon and should not be unnerving. However, when investors see the value of their investments dwindling, their aversion to losses can compel them to sell. And once they have sold, they stay out of the market.
But that can cost investors dearly as those who sit on the sidelines risk losing out on periods of meaningful price appreciation that follow market downturns. Even missing out on just a few trading days can take a toll. A hypothetical investment of $1,000 in the MSCI ACWI made in 2010 would have grown to $2,060 by the end of 2019. But if an investor missed the 30 best trading days of that period, they would have ended up with 99% less.

Missing just a few best days in the market can hurt your investment returns.

Value of hypothetical $1,000 investment in the MSCI ACWI, excluding dividends, from 1 January 2010 to 31 December 2019

Past results are not a guarantee of future results. For illustrative purposes only. Investors cannot invest directly in an index.

Values in USD. As at 31 December 2019. Sources: RIMES, MSCI

“I think the most important thing is to keep a long-term orientation. Trying to figure out what the market’s going to do today or even next week is an impossible task and one that I don’t think is helpful to creating long-term wealth.”

Tim Armour, Chairman and Chief Executive Officer


Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. The information provided is not intended to be comprehensive or to provide advice.