5 THINGS YOU NEED TO KNOW TO RIDE OUT A VOLATILE STOCK MARKETSubmitted by Brian Gaffney on April 12th, 2018
5 THINGS YOU NEED TO KNOW TO
RIDE OUT A VOLATILE STOCK MARKET
Franklin Templeton Investments
“The market seems to be
up one day and down the next.
I’d rather wait before investing.”
- WATCHING FROM THE SIDELINES MAY COST YOU
When markets become volatile, a lot of people try to guess when stocks will bottom
out. In the meantime, they often park their investments in cash. But just as many
investors are slow to recognize a retreating stock market, many also fail to see an
upward trend in the market until after they have missed opportunities for gains.
Missing out on these opportunities can take a big bite out of your returns. Consider
that in the 12 months following the end of a bear market, a fully invested stock
portfolio had an average total return of 37.1%. However, if an investor missed the
first six months of the recovery by holding cash, their return would have been
The table below is a hypothetical illustration showing the risk of trying to time
the market. By missing just a few of the stock market’s best single-day advances,
you could put a real crimp in your potential returns.
Jumping In and Out of the Market May Cost You
20 Years Ended December 31, 2017
Period of Investment Average Annual Total Return of S&P 500 Index2
Stayed Fully Invested 7.20%
Missed the 10 Best Days 3.54%
Missed the 20 Best Days 1.15%
Missed the 30 Best Days -0.91%
Missed the 40 Best Days -2.81%
This table is for illustrative purposes only.
“It’s hard to invest
when stocks are
2. DOLLAR-COST AVERAGING MAKES IT EASIER TO COPE WITH VOLATILITY
Most people are quick to agree that volatile markets may
present buying opportunities for investors with a long-term horizon. But
mustering the discipline to make purchases during a volatile market
can be difficult. You can’t help wondering, “Is this really the right time
Dollar-cost averaging can help reduce anxiety about the investment
process. Simply put, dollar-cost averaging is committing a fixed amount
of money at regular intervals to an investment. You buy more shares
when prices are low and fewer shares when prices are high, and over
time, your average cost per share may be less than the average price
per share. Dollar-cost averaging involves a continuous, disciplined
investment in fund shares, regardless of fluctuating price levels.
Investors should consider their financial ability to continue purchases
through periods of low price levels or changing economic conditions.
Such a plan does not guarantee a profit or eliminate risk, nor does
it protect against loss in a declining market.
Dollar-Cost Averaging at Work
Month Monthly Investment Amount Share Price Shares Purchased Each Month
January $500 $9.00 55.6
February $500 $10.00 50.0
March $500 $8.00 62.5
April $500 $11.75 42.6
May $500 $12.25 40.8
June $500 $9.00 55.6
Total $3,000 $60.00 307.1
Average Share Price: $10.00 ($60.00/6 purchases)
Average Share Cost: $9.77 ($3,000/307.1)
The average cost of your shares would be $0.23 less than the average price
of your shares over that period. Figures are for illustrative purposes only.
“I wonder if I should be
3. NOW MAY BE A GREAT TIME FOR A PORTFOLIO CHECKUP
Is your portfolio as diversified as you think
it is? Meet with your financial advisor to
find out. Your portfolio’s weightings in
different asset classes may shift over time
as one investment performs better or worse
than another. Together with your advisor,
you can re-examine your portfolio to see if
you are properly diversified. You can also
determine whether your current portfolio
mix is still a suitable match with your goals
and risk tolerance.
“With so many opinions about the market,
I don’t know who to listen to.”
4. TUNE OUT THE NOISE AND GAIN A LONGER-TERM PERSPECTIVE
Numerous television stations, websites and social media channels are dedicated to reporting
investment news 24 hours a day, seven days a week. What’s more, there are almost too many financial publications
to count. While the media provides a valuable service, they typically
offer a very short-term outlook. To put your own investment plan in
a longer-term perspective and bolster your confidence, you may want
to look at how different types of portfolios have performed over time.
Hypothetical Performance of Asset Allocation Portfolios
20 Years Ended December 31, 2017
Growth of a $10,000 Investment Average Annual Total Return 1-YEAR CUMULATIVE RETURNS (%)
100% Stocks $32,845 6.13% 37.07 -38.62
80% Stocks | 20% Bonds $33,618 6.25% 30.47 -29.84
60% Stocks | 40% Bonds $33,192 6.18% 23.89 -21.08
40% Stocks | 40% Bonds | 20% Cash $28,196 5.32% 16.68 -12.99
20% Stocks | 60% Bonds | 20% Cash $27,190 5.13% 10.34 -4.08
The hypothetical asset allocation portfolios shown above are for illustrative
purposes only. They do not represent the past or future portfolio composition
or performance of any Franklin Templeton fund and are not intended as
investment advice. We suggest working with your financial advisor to see
which allocation opportunities may be right for you.
“We’re sticking to our long-term investment plan.”
5. BELIEVE YOUR BELIEFS AND DOUBT YOUR DOUBTS
There are no real secrets to managing volatility. Most investors already know that the best way
to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio.
But sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you sometimes begin doubting your
beliefs and believing your doubts, which can lead to short‑term moves that divert you from your long-term goals.
To keep a balanced perspective, we
recommend that you contact your financial
advisor before making any changes to your
1. Source: © 2018 Ned Davis Research Group, Inc. Ned Davis Research defines a bear market as a 30% drop in the Dow Jones Industrial Average after 50 calendar days or a 13% decline after 145 calendar days.
Reversals of 30% in the Value Line Geometric Index also qualify. As of 12/31/17, 29 bear markets were analyzed from 9/3/29 through 2/11/16. For illustrative purposes only. Indexes are unmanaged, and one cannot
invest directly in an index. Important index provider notices and terms available at www.franklintempletondatasources.com.
2. Source: Standard & Poor’s. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.