Peter Lazaroff writes in his blog 4 Reasons Investors Should Worry About Market Volatility.
He says, Volatility is normal, but you should be more concerned if any of these things apply to you.
You went to cash.
Even if you could accurately predict the future, knowing how the market will react is impossible. Going to cash requires you get it right twice — once when you sell stocks and once when you buy back in — making an already tall task insurmountable.
Plus, the best days for the stock market historically follow the worst days. Missing out on those returns from the best days basically locks in permanent underperformance versus the overall market.
You own concentrated individual stock positions.
Where we lack certainty, we can turn to probability, and the probabilities suggest that individual stocks are much riskier than you might realize.
Looking at historical rolling annual returns, individual stocks trail the median S&P 500 return 75% of the time. Even worse, 40% of companies that were ever in the Russell 3000 experienced a permanent 70% decline in price from peak levels.
Your portfolio lacks global diversification.
U.S. large cap stocks, as measured by the S&P 500, has been the dominant asset class since the Financial Crisis, but non-U.S. stocks have historically performed better than U.S. stocks in down markets.
The fact that U.S. and non-U.S. stocks don’t move in perfect tandem means that combining them can improve risk-adjusted returns. In plain English, that means you earn more return for the amount of volatility experienced.
You don’t have a long-term financial plan.
Market downturns are likely to continue occurring with a similar magnitude and frequency as they have in the past. Rather than try to predict when or why they will occur, it’s far better to plan on them.
Without a plan, you don’t have a sense for how losses of any size impacts you, and any actions you might take will be purely reactionary — a recipe that historically results in bad outcomes.
If none of the above situations apply to you, then you shouldn’t worry about market volatility.
Stay the course and focus on things you can control.
Of course, what Peter says makes sense. Yet history shows investors do the wrong things…often because they make decisions based on how they feel in the moment. It’s natural to do so, but it also lose sight of the horizon.
When you seek advice, you need someone to talk to to help you put into perspective your views and your feelings. Then you increase the chances of making better decisions.