How can I meet my long-term goals if the market is in turmoil?

In difficult times, your first instinct may be to get out of the market until things calm down. But separating investment decisions from emotions and continuing to focus on the long term are critical, especially in volatile markets. They could mean the difference between missing and exceeding your long-term financial goals.

Let’s look at how the markets have reacted to, and rebounded from, past crises.

The Market is Resilient

Historically, the US stock market has dipped at times of political and economic instability or when catastrophic events occur, but over time the market has continued to rise.

The chart below shows the movement of the S&P 500 Index from 1926 to 2013.


As the chart shows:

In 1940, France fell and spurred uncertainties in the US markets. After two down years, the attack on Pearl Harbor and subsequent US entry into World War II, many investors fled the markets. What would you have done?

Investors who pulled out of the market probably missed the 1942-1945 bull market during which their assets would have grown by 150%.

In the aftermath of the tragic events of 9/11, human emotion played a very large role in investment behavior. Many people again fled the markets as the S&P 500 Index plummeted 22.1% in 2002. Those who did might have missed the rebound the very next year when the market rose 28.7%.

Time Horizon and Risk

Markets can be volatile in the short-term, but the variability of your returns decreases when you invest for the long term.

The chart below compares 1-year returns and 10-year returns for the S&P 500 Index from 1926 to 2013.


As the chart shows:

Since 1926, the S&P 500 experienced negative annual returns in 24 years, or 27% of the time.

If you hold for the long term (10 years or longer), volatility is greatly reduced. Since 1926, there have only been four 10-year periods with negative returns, or just 5% of the time.

Investing involves risk, including possible loss of principal.


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