December 18 was a big negative day in the stock market with the Nasdaq Composite (NASDAQINDEX: ^IXIC) fell by 3.6% and the S&P500 (SNPINDEX: ^GSPC) a decrease of 2.9%.
The main catalyst for the sell-off was an update from the Federal Reserve, which indicated it would slow the pace of interest rate cuts through 2025, which could keep interest rates high and, as a result, slow economic growth.
In the meantime, valuations across the market are too highand some investors may be wondering if this is a good time to sell shares and run for the exits. Here are some lessons worth remembering when it comes to managing your portfolio in times of volatility.
In this situation, it’s good to keep this excellent quote from Ken Fisher of Fisher Investments in mind: “You don’t need perfect timing to get great returns. Time in the market beats timing the market – almost always.”
The quote is a nod to the power of compounding. For example, take two investors who each start with $10,000. The first person enjoys a return of 10% over 30 years. Matching the historical average annual return of the S&P 500 still puts them at about $174,500. Meanwhile, the second person earns a phenomenal annual return of 20% per year, but only invests for 15 years. Despite outperforming the first investor by a wide margin, they ended the period with approximately $154,100.
Some of you may look at this calculation and argue that no one is getting any younger, so while it would have been great to start investing earlier, that ship has sailed. But the lesson that time in the market beats market timing still applies.
Otherwise, boosting savings can help compensate for a narrower time horizon. For example, let’s take two investors with the same ten-year time horizon, starting with $10,000 and earning an average return of 10% per year. The first investor puts an extra €500 into his portfolio every month, while the other puts €750 to work every month.
It’s only a difference of $250, or $3,000 per year. But in ten years, that higher savings rate will make a big difference. The $500 per month investor would end up with $251,800, but the $750 per month investor would have more than $355,000. Their $30,000 in additional contributions grows to more than $100,000 over the decade.
So when faced with stock market volatility, it’s essential to understand the pitfalls of emotional reactions and panic selling. The goal should not be to try to jump in and out of the market, but to accumulate shares of quality companies while at the same time making the power of compounding work in your favor.