Skip to main content


Navigating Market Volatility

In simple terms, market volatility is the relative rate at which the market goes up and down. Dramatic shifts can be scary, even for the most experienced investors. To keep market swings from making you anxious, take steps to help you respond to volatility in a deliberate way.

1: Have a Plan

Often when people think of successful investing, they think of trading on a hot tip or chasing the hottest trends. Sure, you may read the occasional story about someone striking it rich by “playing the market,” but those get-rich-quick stories are the exceptions, not the rule. For most of us, successful investing isn’t about becoming a millionaire overnight, it’s about watching our savings grow over time.

The most successful investors have a plan in place tailored to their personal investment objectives and financial situation. When formulating your investment plan, take into account your time frame, available capital, risk tolerance and savings objectives. Be realistic and specific when determining your short-term (buying a new car next year) and long-term (retirement in 10 years) goals. Having a plan in place can help ensure that you’re making investment decisions based on sound reasoning, not on emotions. And with sound reasoning behind your choices, you will be less likely to chase the latest trend, and lose.

If you don’t feel comfortable making your own investment decisions, there are professionals who can help. Consider purchasing shares of an actively managed mutual fund, or hiring a knowledgeable financial advisor to help lead you on the right path. In the long run, the cost of investing your hard-earned money in something you don’t really understand may be much higher than the cost of hiring a professional to do it for you.

2: Determine Your Risk Tolerance

When you put your hard-earned money into investment vehicles, such as stocks, bonds or mutual funds, you take on certain risks: credit risk, market risk, business risk, just to name a few. All types of investments have inherent risk(s): a stock price may drastically decline; the issuer of a bond may default; even cash investments (U.S. Treasury bills or money market mutual funds) carry the risk of losing ground to inflation.

Taking on some risk is often the price you must be willing to pay if you want to achieve higher returns. In light of this risk/return tradeoff, you must determine your personal tolerance for risk when choosing investments for your portfolio.

Age Generally, the younger you are, the more risk you may be willing to take because you have more time to make up for any losses you might experience along the way.
Risk capital If you are the primary earner for your family, for example, you may want to take on less risk than you would if you were single.
Net Worth The larger your investment pool, the more willing you may be to take on risk. Just make sure you can still manage comfortably if you experience any big losses.
Time Frame When do you plan to withdraw the money? The markets are subject to short-term fluctuations. If you invest money you plan to use soon, you could be forced to sell when the price is down.
Timeline How long will you need the money to last? As you get closer to retirement, it is often recommended you move at least some of your assets out of more volatile stocks and/or stock funds into income-producing bonds and/or bond funds. You may want to consider leaving at least a portion of your investments in equities (with growth potential) in case you live longer than you expected.

No matter what investment vehicle(s) you choose, the objective is always the same: to generate more cash for yourself in the future than you have today. If you keep all your money under your mattress, for example, your balance will never grow beyond the amount you save. Inflation (the rate at which prices for goods and services increases) is also guaranteed to eat away at your purchasing power over time. So, actively avoiding all risk is also risky. By investing your money, the potential exists for you to come out ahead—perhaps even far ahead.

3: Don’t Try to Time the Market

There have been numerous studies over the years detailing the importance of staying invested in the market, even during turbulent times—picking an active, passive or combination strategy, refraining from trying to “time” the market, and then letting the strategy work for you. Study after study has shown that when investors don’t stay the course, they do damage to their portfolio through poor timing: selling at or near the bottom and/or buying after the market has already appreciated.

Dalbar, Inc. is the nation’s leading financial services market research firm and performs a variety of ratings and evaluations of practices and communications. As stated in multiple Dalbar’s Annual Quantitative Analysis of Investor Behavior reports: “Since 1994, Dalbar’s Quantitative Analysis of Investor Behavior (QAIB) has measured the effects of investor decisions to buy, sell and switch into and out of mutual funds over short and long-term time frames. The results consistently show that the average investor earns less—in many cases, much less—than mutual fund performance reports would suggest.”

To demonstrate this effect, the chart below focuses on the last twenty-five years of daily returns for the Weitz Partners Value Fund Investor Class (WPVLX) and the S&P 500 through the end of September 2019. Using an initial purchase of $10,000, comparative performance assumes an investor missed the best 10, 20 and 30 performance days of the S&P 500. The results show the major impact of missing just a few important investment days.

What the data doesn’t show is that 40% of the S&P 500 top 30 performance days were followed by bottom 30 performance days within two weeks. Unless you are incredibly accurate with the timing of your buys and sells, trying to time the market can—and usually does—lead to missing out on substantial returns.

Visit the Weitz Partners Value Fund-Investor Class (WPVLX) fund detail page to review the Fund’s fees, risks and most recent month-end standardized returns as well as returns for the S&P 500 Index.

4: Invest at Regular Intervals

In a perfect world, we would always know the right time to buy (low) and sell (high). But in the real world, market behavior is difficult, if not impossible, to predict. An investment strategy known as dollar-cost averaging can help take the guess work out of when and how much to invest. Dollar-cost averaging is an investment technique of purchasing a fixed dollar amount at regular intervals over a period of time. This long-term strategy can help reduce your exposure to the possible risks associated with making a single large purchase at the “wrong” time.

With dollar-cost averaging, the dollar amount of each investment remains constant, but the number of shares you buy varies based on the share price at the time of a purchase. When the markets are up, you buy fewer shares; when the markets are down, you buy more shares. Dollar-cost averaging can relieve you of the stress of constantly monitoring market movements in an attempt to time your investments.

The charts below demonstrate how dollar-cost averaging works.

Scenario 1: Purchase a fixed dollar amount monthly

Monthly investment amount Price per share Number of shares purchased
$500 $10 50
$500 $20 25
$500 $25 20
$500 $20 25
$500 $25 20
$2,500 $20 140

Scenario 2: Purchase a fixed number of shares monthly

Number of shares purchased Price per share Monthly investment amount
28 $10 $280
28 $20 $560
28 $25 $700
28 $20 $560
28 $25 $700
140 $20 2,800

Dollar-cost averaging can smooth out some of the short-term “bumpiness” of the financial markets. By investing regularly over a number of years (or decades), short-term downturns will have little effect on the long-term performance of your portfolio.

5: Look for Profitable Opportunities

The markets don’t move in a linear fashion. From the moment a security is offered to the public, its price begins to rise and/or fall based on market forces (such as the effect of supply and demand on trading). And security prices, while unpredictable in the short term, are affected by real things, including business fundamentals; a company’s current and estimated future earnings; world events (good or bad); and, in the short run, investor psychology.

Successful investors recognize that no one can accurately predict when emotional tides will turn. Former Federal Reserve Chairman Alan Greenspan said in 2007, “If I could figure out a way to determine whether or not people are more fearful or changing to euphoric…I could forecast the economy better than any way I know. The trouble is that we can’t figure that out. I’ve been in the forecasting business for 50 years, and I’m no better than I ever was, and nobody else is [either]. Forecasting 50 years ago was as good or as bad as it is today. And the reason is that human nature hasn’t changed. We can’t improve ourselves.”

Human behavior and stock prices are often more volatile than actual changes in fundamental business values. When investor emotions affect stock prices, inefficiencies can occur, leaving some companies temporarily mispriced. Savvy investors can take advantage of these market inefficiencies by purchasing securities that are underpriced and/or selling securities that are overpriced. Of course, the trick is knowing what and when to buy and sell.

6: Diversify

You’ve probably heard it a million times—diversify, diversify, diversify. To diversify your portfolio simply means to invest in a variety of securities, with the hope that positive performance of some investments will offset any negative performance in others. The goal of diversification is to build a portfolio that includes investments that react differently to the same economic factors, limiting the risks associated with “putting all your eggs in one basket.”

When building your portfolio, there are three main asset classes from which to choose: stocks, bonds and cash equivalents. Each asset class has its own level of risk and return. Equities, for example, may offer not only the highest potential return but also the highest risk. On the other hand, U.S. Treasury bills are considered one of the least risky investments (because they are backed by the U. S. government), but they also generally offer low potential returns.

Beyond just assets classes, you can diversify even further by allocating your money to different subclasses. For example, within the stock category you can choose investments based on various market capitalizations: large companies, mid-sized companies and small companies. You might also include securities issued by companies that represent different economic sectors. If you're buying fixed income securities, you might choose bonds from different types of issuers: corporations, the U.S. government, etc. When determining your optimal asset mix, remember your investment objectives, time horizon, available capital and tolerance for risk.

Many retail investors have a limited investment budget, sometimes making it difficult for them to put together a diversified portfolio on their own. Buying shares of a mutual fund can provide a readily available source of diversification.

7: Let Compounding Work for You

Albert Einstein is widely rumored to have called compound growth the most powerful force in the universe. Compounding is the process by which an asset generates earnings not only on the initial principal but also on the accumulated earnings from prior periods. In simple terms, it means generating earnings on previous earnings.

The future value of any investment depends on three main things: 1) the dollar amount(s) you contribute; 2) the rate of return you earn; and 3) the length of time you save. Naturally, increasing any of these elements can increase the future value of your investment, but one component is more important than the others: time. The longer your money is invested, the more compounding can potentially grow your assets.

Years ago, Warren Buffett wrote that the Native Americans who received $24 from the sale of Manhattan Island in 1626 may have gotten the better deal. He explained that if the $24 had been invested at only 6% interest, it would have grown today to a higher value than the multi-billion-dollar current real estate value of Manhattan.

The table below shows the dramatic effect of compounding on a $10,000 investment, even at relatively modest rates:

  5% 10% 15% 20%
5 Year $12,763 $16,105 $20,114 $24,883
10 Year $16,289 $25,937 $40,456 $61,917
15 Year $20,789 $41,772 $81,371 $154,070
20 Year $26,533 $67,275 $163,665 $383,376
25 Year $33,864 $108,347 $329,190 $953,962
30 Year $43,21 $174,494 $662,118 $2,373,763

While compounding is powerful and can help increase your wealth over time, the key to its success is to start saving early, avoiding major losses along the way. Of course, you can’t go back in time to begin saving 10 years ago. What you can do is not wait another 10 years to start. Save for your future right now, and let compounding work its magic for you.

8: Try Not to Dwell on Short-Term Performance

In the face of market volatility, your instincts might compel you to act quickly (panic selling and/or euphoric buying). But this type of impulsive trading can—and usually will—be detrimental to your long-term results.

The reason you bought an investment in the first place is because you believed in its potential for growth. If you find a company with strong business fundamentals, short-term price fluctuations probably won’t affect its long-term value. In fact, short-term periods of volatility often present a great time to buy more stock, if you still believe in the company. On the other hand, be sure to have an exit strategy in place if a company’s stock reaches your predetermined target price, or if the fundamentals of the business take a negative turn. And remember, before selling a losing investment, take a moment to decide if the downturn is simply a short-term blip or if it’s actually a permanent risk to your capital.

Dramatic shifts in the markets can be scary, even for the most experienced investors. Although it’s human nature to want to “get out” when things look bad, choosing to stay invested in spite of market volatility can often be the best course of action, if you have a plan in place and are confident in your strategy.

background Back to top