Financial Insights

Just Another Ride on the Roller Coaster

It was a breathtakingly volatile week in the equity market, even more remarkably so for the paucity of reasons for the wild fluctuations.  A host of explanations were given, yet none were satisfying.  In fact, stocks have demonstrated such outsized volatility surprisingly often in the past.  For the most part, it is primarily noise.  That’s why huge drops can be followed by dramatic rallies.  Since the downdrafts can’t be anticipated, the key is taking advantage of them after they occur.  This means using bonds or cash, if available, to buy, or swapping into securities that fell excessively, even though the natural inclination of most investors is to sell to get out of the way.  As Warren Buffett said, “be fearful when others are greedy and be greedy only when others are fearful.”

Lots of reasons have been given for a slide in stock prices:

Why are stocks so volatile?

Investors need to recall they own a piece of the U.S. economy when they own stocks and their investment holdings will recover, even if the economy does lapse into recession.  Recessions and stock market declines are normal, but are difficult to anticipate.  So, investors must be prepared psychologically to live with such events.  It helps to understand that most stocks are not lottery tickets that are at risk of becoming worthless.  So they need to think like company owners and invest for the long term.  Their holdings may fall in value in the short term, but in the longer term, their investments will grow with the economy.  It is that growth that provides cash flows in retirement.  Pulling out of the stock market to avoid volatility and to be safe also prevents those investors from participating in the growth of the economy or their portfolios from recovering after downdrafts.  It may be difficult psychologically, but it is almost always time to buy when the market suffers a serious downdraft.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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