Market volatility: How staying invested may help you in the long run

In an ideal world, investors wish to buy low and sell high.

In the real world, investors often do the exact opposite—buy high and sell low—especially during volatile times. We see stocks going up and down because of the coronavirus or political uncertainty, and our brains say “run.” But in the long run, you’re generally better off staying the course rather than trying to jump out, then back into, the market.

That’s because it’s never about timing the market. It’s more about time in the market.

The importance of staying invested during market volatility

During volatile times, it can seem really appealing to change how you invest in hopes of a better return. Let’s look at a case study of how timing the market could impact your retirement savings.

In 2008 and 2009, we experienced a period of extreme market volatility due to the explosive growth of the subprime mortgage market.

Case study: Timing the market

Imagine it’s January 1, 2008, and you have $100,000 invested in the market, and the bumpy ride drops you down to $64,388 balance in one year.

So, frustrated by the declining value of your investment, you take that remaining $64,388 out of the market. You decide to go with a more “stable” investment, putting your money into a guaranteed interest investment (a CD) with a 2% return for the next five years. During those five years, with the guaranteed interest, your balance increases to $71,090.

But what if, in 2009, you decided to ride out the ups and downs and kept your money invested in the market instead? By staying in the market, based on S&P Index returns at that time, you would have had $123,862 after five years.

Bottom line in this case study: You could have had $52,772 more if you’d stayed in the market instead of moving your money into a CD.

When facing Market volatility: the ways to help you keep calm

1. Regular review your goal, risk tolerance, and time horizon.

To ensure your asset allocation continues to be in line with your long-term goal. If it’s still lined up with your goals, then you likely don’t need to make changes and you can ride out the market volatility. If it’s not, then realigning your allocation based on your goals, risk tolerance, and how long until you’ll need the money will help you achieve long-term success.

2. Rebalance your investments.

Over time, the value of your investment mix (“asset allocation”) can change as some investments grow more than others. Rebalancing sets everything back to your original mix and may minimize the impact of market volatility.

3. Focus on your day-to-day finances control.

Set up a budget. Build up your emergency fund. Pay down debt. Those are things you can do now—no matter what markets are doing—to help control or improve your family’s financial situation.

4. Reserve for the future.

Hong Kong's MPF system is to establish savings discipline for the workforce. The earlier you start investing, the more you will get upon retirement due to the power of compounding. We can also further enhance retirement protection through voluntary savings, including "Tax deductible Voluntary Contributions" (TVC), Employee Voluntary Contributions (Employee VC), and Special Voluntary Contributions (SVC).

Investment involves risks. This information is for general reference only.