Market volatility is a natural and unavoidable part of investing. Volatility measures how much the market—or an individual investment—moves up and down over time, and it applies to both stocks and bonds. In simple terms, it reflects how much an investment’s value has fluctuated historically. While it is often framed as a risk to be avoided, informed investors may view volatility as a source of opportunity.
Market downturns can be stressful and uncomfortable, however by avoiding common pitfalls and remaining committed to your long-term financial plan, you are better positioned to stay on track and work toward achieving your personal and financial goals.
Common pitfalls to avoid
- An emotional response
During market downturns most people have the natural fear of losing money which can lead to making an emotional and impulsive response. This can prompt investors to sell their investments at the wrong time, usually when markets are down, which locks in the decreased value. Making these rash decisions may lead to regret later on. The best way to avoid emotional reactions is to remain focused on your goals. - Herd mentality
Herd mentality is the tendency for people to think, feel, or act the same way as a larger group, rather than making independent decisions. It is the tendency to conform to the behaviors and ignoring their own personal analysis. In investing, this behavior often occurs during periods of market stress or euphoria when investors follow the actions of the crowd. This can lead to panic selling during market downturn or buying at market highs. - Abandoning your long-term financial plan
Achieving long-term goals begins with clearly defining them. Establishing a well-thought-out, realistic, step-by-step plan is essential to reaching both personal and financial objectives. During periods of market instability, it is important to remain disciplined and avoid deviating from your strategy. Regularly monitoring your progress helps ensure you stay on track and make informed adjustments when necessary. Long-term success requires consistency and the discipline to follow your plan over time. - Timing the market
Many individuals may try to time the market by selling when they believe markets are about to fall and reentering when a rebound is forecasted. Investors must ‘double guess’ to succeed. They must evaluate two scenarios – when to exit and when to reenter. Although timing the market may create some short-term gains, with this strategy the long-term performance may likely be worse than staying invested. Often the market’s best days occur immediately following the worst days, therefore missing these days can severely impact long-term rates of return.
During periods of market volatility, it may be difficult to remain calm and stay the course. There are several strategies that can be considered and implemented to help maintain financial success.
Strategies to support achieving goals and longer-term success
- Work with an advisor
Partnering with a trusted and knowledgeable financial advisor can help you understand your personal and financial objectives and build the plan to meet your goals. In times of market volatility, a financial advisor will help prevent emotional decision-making, such as selling stocks at their reduced value. This can prevent locking in losses. They can provide context, information and data to help clients see that volatility is often temporary and staying invested has historically been shown to be an effective solution for meeting long-term objectives. - Consider cashflow
Understand your budget, specifically your net income and outflows for ongoing expenses. Incorporate and maintain an emergency fund to manage unexpected costs and avoid being forced to sell investments at a loss. - Stay invested
Over the past 66 years, stock market statistics have clearly shown that market upswings, known as bull markets, last longer and have greater returns than when markets are in a downward cycle, known as bear markets. Bull markets typically last longer than times of falling markets. Your portfolio can suffer heavily if you miss even a few good days in the market. The longer the investment time horizon, the more likely you are to experience positive returns, not just through the best times but also through the worst times. - Diversify your portfolio
Your investment portfolio must be aligned with your goals, objectives, risk tolerance and time horizon. Diversifying your investment portfolio means spreading your money across different types of investments so you’re not relying on just one to perform well. The goal is to reduce risk while aiming for more stable, long-term returns. Diversifying your portfolio includes incorporating the right mix of stocks and bonds, spreading investments across various sectors such as financials, health care, technology and energy, investing in different regions like Canadian markets, US markets and International and emerging markets along with investing in a variety of distinct styles such as growth vs value, small/mid/large cap companies and passive vs active investments.Diversifying will help manage risk and smooth returns over time along with reducing exposure to any single investment failure. Diversification does not eliminate risk entirely or guarantee profits. A diversified portfolio is unlikely to have the highest returns but is also not expected to have the lowest returns. - Rebalance regularly
It is recommended that you meet regularly with your financial advisor to review your financial goals and assess your investments. These meetings help ensure your portfolio remains aligned with your financial goals. Rebalancing the investment portfolio during these reviews maintains the original asset allocation between stocks (equity) and bonds (fixed income) and reduces overexposure to any single asset class. This process helps manage risk and prevents a portfolio from becoming too risky if one asset class outperforms. Rebalancing keeps your investments consistent with your risk tolerance and time horizon, particularly when market movements cause certain asset classes to outperform others.
- Reinvesting dividends
Consider building wealth through reinvesting dividends. Dividend paying equity funds give a portion of their profits back to the investors which can be taken as cash payment or reinvested to buy more shares. The additional shares can generate their own dividends as well as having market growth. This creates a compounding effect. Patience is key as the longer the investments are held, the greater the potential for growth over time. - Tax-loss harvesting*
Tax-loss harvesting is an investment strategy used to help reduce taxes by intentionally selling investments that have declined in value to realize a capital loss. These realized losses can then be applied to offset taxable gains, which may lower the amount of taxes owed. If losses exceed gains, the remaining losses may be carried back three years to offset capital gains you reported in those years or can be carried forward to future years.You cannot claim a loss if you (or an affiliated person, like a spouse or company you control) rebuy the same or identical security within 30 days before or after the sale. If you do, the loss is denied. Tax-loss harvesting is used within non-registered (taxable) accounts only, is beneficial during volatile markets or temporary downturns for investors with current or future capital gains and in high marginal tax rates.
*Because tax rules and individual circumstances vary, it is important to consider your personal tax situation and consult with a qualified financial or tax professional before implementing this strategy
- Take advantage of dollar-cost averaging
Dollar-cost averaging (DCA) is an investing strategy where you invest a fixed amount of money at regular intervals, regardless of whether prices are high or low. Instead of trying to “time the market”, you spread your investments over time. This can help lower the average cost per unit of what you’ve bought overall, which may enhance long-term investment outcomes. Through DCA you don’t need to guess the “best” moment to invest, which is extremely difficult even for professionals. DCA encourages regular investing which builds a consistent habit and helps avoid emotional decisions. You don’t need a large lump sum to start—just a manageable, recurring amount.
Severe market volatility can create stress and anxiety for many investors, often leading them to question the benefits of investing in the stock market. While markets have faced numerous disruptive events, historical data shows that, over the long term, they have generally rebounded and helped investors build lasting financial success. The key to navigating market uncertainty is establishing your goals, objectives, risk tolerance, and time horizon early on. By building an investment strategy aligned with these factors – and staying committed to it – you can avoid making impulsive decisions that may lead to regret.
Working with a trusted and knowledgeable financial advisor can help provide perspective, discipline, and reassurance during turbulent times, helping you stay focused on your long-term plan rather than reacting to short-term market conditions.
FirstOntario Credit Union in partnership with Aviso Wealth has an experienced team of advisors specializing in various areas of wealth management, including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.