Coping with market volatility

Robert Schultz, an Accredited Asset Management Specialist and Customer Relationship Manager with the Chamber Pension Plan helps you navigate through the investment minefield when it comes to your pension.

A long period of positive returns and low volatility for the financial markets ended in 2007, as huge losses in mortgage-related securities hit the financial services industry. As the problems worsened through 2008, a credit crisis ensued, giving rise to serious concerns about economic growth, both in the U.S. and abroad. The result: intensifying market volatility.

Times like these are difficult for all investors. But it’s important to keep matters in perspective. Avoiding rash decisions, reviewing your savings and investment strategies, and focusing on your long term goals could be key to persevering during difficult market environments.

Recession fears and market volatility make investors skittish about investing, with many pulling money out of the stock market after experiencing much of the decline. What many may not be aware of is that, typically, stock market declines begin prior to the arrival of the recession and the rebound begins while the recession is still underway. A recent study of nine recessionary periods showed the following trend. On average, as the market anticipates recession, there is a typical decline period that spans until the middle of the recession. Then, as the market discounts economic recovery, stock market returns tend to be positive. Thus, from the midpoint of the recession through six months after, the stock market has achieved positive returns. Keep in mind, however, that past performance is no guarantee of future results.

There is no doubt that the recent market drop and increased volatility has negatively impacted pension plans throughout the island. Most economists are calling this an “Eighty Year Event”, meaning most of us will never see another drop like this in our lifetime. With that said, it is important when it comes to your pension account to think long term. Maintaining your current contributions at regular intervals can be rewarding in a market downturn. Because you invest a regular dollar amount, a market decline presents an opportunity to purchase more shares at favourable prices. This is better known as dollar cost averaging. You may also consider additional voluntary contributions as a means to take advantage of this downturn and potentially increase your future nest egg significantly.

In conclusion, no one can predict the short-term direction of the markets or how soon an economic recovery may begin. Factors such as investor psychology, global political events, unexpected economic conditions, interest rates and inflation can drive markets in any direction. Most downturns are short-lived, but some may have lasted for several years. Investors who have employed a diversified portfolio and maintain a long-term perspective may have a better likelihood of meeting their goals.



Robert Schultz