For most investors, volatility isn’t fun. Investor sentiment has slumped to notably pessimistic levels, so it’s no wonder that we’re hearing more questions about whether it’s time to “get out” of the market or at least hold onto excess cash until the storm passes.
The short answer is no. In fact, for most long-term investors, it’s probably actually the time to stay — or get — invested. You might view that as a reductive investment cliché but hear us out.
You should never put all your eggs in one basket. This golden rule of investing is particularly true in the long run. The idea is that a diverse portfolio can help mitigate losses in the event of a market downturn.
In 2022’s sell-off, we’ve seen both stocks and core bonds decline, but even just a basic diversified portfolio, such as one comprising 60% MSCI World equities and 40% Global Aggregate Bond Index exposure, has offered protection. At their worst point in January, global stocks were down -8%; the diversified portfolio was down only -6%.
Given that investors are human, and humans are emotional beings, this difference has more value than you might think.
DALBAR, a financial services research firm, has made sense of how emotions impact investment decisions by studying the timing of mutual fund flows. Based on that fund-flow analysis, DALBAR approximates the return achieved by the average investor over a 20-year period. Its conclusion was that most investors are bad at market timing, though they try to do it anyway.
Diversification can help lessen the amount of pain investors may feel when they look at their statements during a drawdown, so it can also help avoid the temptation to sell out of investments when things get volatile.
The bottom line: Diversification, time in the market and a steady head can help investors achieve their long-term financial goals by avoiding the pitfalls of emotionally driven, badly timed mistakes. When times get tough in markets and you feel nervous, remember these lessons from tried-and-true investing principles.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for
J.P. Morgan Private Bank.
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