Making sense of market volatility

This article was last updated on Feb. 1, 2022.

Fluctuations in the public markets are not entirely uncommon. Over the past century, the S&P 500 has collectively produced annualized average returns of about 10% (not adjusted for inflation). Of course, this doesn’t mean that stocks are always increasing in value at any point in time, and while the S&P 500 is a leading indicator it does not represent the entire stock market.

The U.S. stock market enters what’s known as a correction when the aggregate value of the S&P 500 drops by 10% or more. A bear market occurs when prices fall by 20% or greater. At the start of the COVID-19 pandemic in March 2020, the U.S stock market fell by 10% in a single day, and in just a few days it fell by more than 25%.

The crypto markets are relatively new compared to the U.S. stock market, and tend to see greater volatility than the stock market overall.

Historical context

History provides several examples of significant market events that have recovered from declines. Experts cite Black Monday (1987), the tech bubble collapse of the early 2000s, the 2007-2008 global financial crisis, and the start of the COVID-19 pandemic in March 2020 as key periods of volatility.

U.S Stock Market: 1980-Present

Frame 992Robert Johnson, a financial professor at Creighton University’s Heider College of Business, points out that the biggest ally that anyone has in investing is time. Young investors innately have time to learn over their lifetime, but they also need discipline, he said. Maya Tussing, co-founder of Fairlight Advisors in San Francisco, noted that perspective is important when investing for the long-term. “You’re going to live through a lot of these events,” she said. “Maybe it’s the first, but it won’t be the last.”

Bitcoin’s Price Over Time

Historically, the price of Bitcoin has been a leading indicator for the crypto markets overall. As Bitcoin and other crypto assets have gained more mainstream popularity over the past few years, crypto investors have experienced significant volatility. In the summer of 2021, the price of Bitcoin nearly halved before recovering to an all time high of more than $65,000 in November 2021. Since then, the price of crypto has dipped again and as of early Feb. 2022 is 40% below the all-time high.

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Managing your portfolio during volatility

During periods of market volatility, you may have questions around the short-term impact on your portfolio.
The experts we spoke with agreed that resetting goals after a volatile few weeks of returns may be premature given the uncertainties that may still linger.

Buying the dip, explained

They also reiterated the common adage that “time in the market beats timing the market.” If you’re investing over the long-term you might continue to invest in the companies you believe in regardless of external events. This is commonly referred to as “buying the dip,” but keep in mind that most financial experts refer to this in the context of investments you continue to believe in over time. All stocks that drop will not inevitably recover, so be wary of universal applications of this popular phrase.

Dollar-cost averaging, or DCA

Experts suggest that investors who employ a dollar-cost averaging approach might consider taking advantage of investing in stocks they want to own for a long time at a lower price. Dollar-cost averaging simply means committing to investing a set dollar amount on a consistent basis, no matter what the stock price is. This method allows people to invest consistently in the companies they believe in and suppresses our natural inclination to time the market.

“If you have the financial flexibility, consider slightly modifying your plan to add a little more to your scheduled investment account contributions to take advantage of better pricing,” said Thomas Shohfi, assistant professor at the Lally School of Management and Technology at Rensselaer Polytechnic Institute. “However, note that we are in an unprecedented economic disruption that has increased market volatility substantially: don’t try to time a market bottom which is extremely difficult.”

Financial advisor Morgan Newman echoes the important consideration that nobody knows when the bottom is going to be. With that, some investors view periods of market-wide decline as a time to put their cash to work.Investors will sometimes look to index funds or exchange-traded funds (ETFs), which mirror indices or sectors and allow you to invest in a basket of stocks at once. An important note: While many ETFs have built-in diversification by virtue of being a collection of stocks, ETFs carry risk as is the case with any investment. ETFs also vary in risk since they can be built around an index, category trend (like consumer staples) or more growth-oriented theme (like tech innovation).

Best practices for navigating market volatility

In times of volatility, many investors will wonder what they can do to take control of their financial future. Here’s what the experts we spoke with said:

Be mindful of your mindset

The S&P 500 has produced annualized returns of 10% to investors over the past century, but this doesn’t mean there won’t be corrections and bear markets along the way. Zooming out to longer time horizons can help investors see the big picture during periods of volatility.

Empower yourself with education

If volatility has you looking at your portfolio 24/7, consider pivoting that act of checking into an educational moment. Look into your allocations and take stock of which companies make up the funds you invest in. Understand what the terms mean and how they work.

The Public app provides context around what stocks are moving—and more importantly, why—right in the app. You can view this context directly below your portfolio and via price alerts.

Additionally, Public Live audio shows are designed to help you understand the latest news and market trends. Public Live shows take place daily, and you can listen to past shows by tapping 🔎 in your app.

Join the conversation

Finally, the Public community is a place to share insights with others. Head over to the Community tab in your app to see what other investors are saying.

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The above content provided and paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.