How can I take control of my investments in today's volatile markets?
Economic and market volatility can be unnerving. As your account balance bounces up and down, it may seem like your portfolio is out of control.
Fortunately, some factors — such as how and when to invest — remain under your control no matter the market conditions, and there are strategies to counteract the effects of volatility and help your portfolio prosper over the long term.
Faced with a volatile or down market, you may become wary or try to time the market by pulling out of it entirely if you believe it’s underperforming. But if you miss just a handful of top-performing days, it can significantly reduce your portfolio’s returns. Market timing is unpredictable — sometimes the best performing day occurs in the midst of a downturn.
The chart below shows the effect on portfolio returns of missing top-performing days.
Front of Chart
As the chart shows:
|An investment of $100,000 in the S&P 500 index at the beginning of 1994, 20 years ago, would have grown to $582,687 by the end of 2013.|
|If that same investment of $100,000 had missed just the top 5 performing days over that 20-year period, it would have grown to only $386,550. That’s nearly $200,000 less than the results from staying invested the whole time|
Use Dollar-Cost Averaging to Start Investing Now
Volatile markets also present the risk of buying at the wrong time — you want to buy when prices are low but it’s difficult or even impossible to correctly choose the best time to invest. With a strategy called dollar-cost averaging, you invest a fixed amount of money at regular intervals, ensuring that you buy more shares of an investment when prices are lower and fewer when prices are higher. This can lower the average cost per share of the investment, yielding higher returns when the market swings back up.
The chart below shows how this would work over a hypothetical year.
Back of Chart
As the chart shows:
|If you used dollar-cost averaging and made regular investments of $1,000 per month, your $1,000 bought fewer shares when share prices were higher and that same $1,000 bought more shares when prices were lower.|
|Alternately, you could have invested $12,000 in one lump sum at the beginning of the year.|
|In the hypothetical market environment depicted, dollar-cost averaging let you buy more shares (617 vs. 480) at a lower average cost per share ($19.44 vs. $25).|