How Should You Respond to Wild Swings in the Markets

February 07, 2019

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What’s going on with the financial markets? Fluctuations in the market may have you feeling panicky and the big swings might be causing you to feel concerned. What’s behind the price swings lately? And, more important, how should you, as an individual investor, respond?

So what seems to have caused these market jitters? Here are the key culprits:

  1. Anticipated slowdown in economic growth and corporate earnings.

    The stock market is forward-looking – investors make decisions based on what they think will happen. And right now, many investors are anticipating a slowdown in economic growth (partially due to higher tariffs and trade disputes) and corporate earnings (as the jolt from the US corporate tax cuts begin to fade). We may still see reasonably strong economic growth and corporate profits, but possibly not at the same level as we had for much of 2018.

  2. Rising interest rates.

    Both the Bank of Canada and the US Federal Reserve raised interest rates in 2018. While higher rates are not bad for all market sectors, they can slow the expansion plans for many businesses, resulting in reduced growth prospects. Global interest rates may continue to rise gradually, but investors are closely watching for any signs that might lead to more rapid interest rate increases.

  3. Slowing global economy.

    The global economy is growing more slowly than expected, resulting in lower returns for international stocks and a particularly sharp decline in emerging markets. While it’s useful to understand the factors causing the recent stock market gyrations, you’ll want to focus primarily on what you can control. As a long-term investor you will probably need to do less than you think. Your diversified portfolio was built to feel steady in rocky times.

If you are feeling a bit nervous consider these three strategies:

  1. Keep realistic expectations

    Try to maintain realistic expectations about how your investments are likely to perform over time. After five years in which the S&P 500’s returns, as a broad market index, have averaged almost 14% per year, we may well be in for a period of more typical returns, possibly in the 5% to 6% range. As always, though, there are no guarantees when it comes to anticipating the performance of the financial markets.

  2. Review your mix of investments.

    From time to time, and sometimes in response to changing market conditions, you may need to change the mix of investments in your portfolio. So, for example, if higher market volatility makes you uncomfortable, you may want to consider adding bonds or other fixed-income vehicles, as these types of investments tend to stabilize stock-heavy portfolios during turbulent times.

  3. Don’t get scared away from investing.

    You may not like seeing multi-hundred-point plunges in the Dow Jones Industrial Average, but don’t get scared off from investing. After all, recent stock market history has taught the value of patience: If you had given up on investing in March 2009, at the market’s low point in the Great Recession, you would have missed out on the considerable rebound gains achieved before the current round of volatility. Of course, the markets past performance can’t guarantee what will happen next.

    The financial markets will always fluctuate – sometimes violently. But as an investor, you should strive for calmness, patience and discipline – because these attributes can help you look past today’s headlines toward the future you envision. Your advisor can help you develop a diversified investment strategy appropriate for your risk tolerance, investing timeframe and goals. Having a strategy in place can help you make appropriate, informed shifts when market conditions change.

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At Edward Jones, we can help you achieve your financial goals. Contact your local Edward Jones advisor about a financial strategy that makes sense for you.

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