Although market volatility may be unnerving to investors, there is nothing new about equity market volatility and declines.
But trying to time the market by getting in and out during these periods does not make any real sense.
Peter Lynch, portfolio manager of Fidelity’s Magellan Fund from May 1977 to May 1990, stated that over the past 96 years there have been 53 occasions when the New York market has fallen at least 10%.
“It happens about once every two years,” he said. “However, over the longer term 10, 20 or 30 years the market is very predictable!”
“You must be prepared to sit through the fluctuations, and the only thing that’s going to keep you from bailing at the wrong times is a belief in the company’s true value.”
It is important to remember that past performance is no guarantee of future returns. However, sitting tight could yield big returns when you consider the performance of the S&P 500 which has posted a 20.6% return for the past 10 years.
Market declines often represent attractive buying opportunities and it is important to focus on the underlying fundamentals.
Lynch believes that over the coming years, markets will be driven by individual corporate fundamentals, and therefore a stock-picking approach should be especially rewarding.
He recommends building portfolios by selecting stocks based on fundamental financial indicators rather than on short-term industry or market trends.
A focus on balance sheets, cash flows, and earnings reveals a company’s true potential for long-term growth.
“What drives the stock market in the long run,” Lynch says, “is corporate profits. Since World War II, profits of companies as measured in the Standard and Poor’s 500 stock index have been growing at a compound growth rate of 8% to 9% per year. The stock market has kept pace, on average, achieving its gains in its inevitable up-and-down style.”
The world is an ever-changing place, and volatility is the nature of equity markets. Investors who maintain a long-term outlook for their investments have an advantage over those who do not.
Successful long-term investors understand that the market will always experience periods of decline, and that although stock investments are considered riskier, history has shown that stocks have a record of outperforming more conservative investments over longer time periods.
In the past, equity investments have offered the highest returns. Ultimately, the key to surviving market volatility is a long-term approach and diversification.
Sticking to an asset allocation strategy, and periodic rebalancing of your portfolio “forces you” to sell high and buy low!
Investing for the long-term, patient investors are always rewarded!