Investing can often feel like riding a roller coaster—thrilling highs followed by sudden, unexpected drops. Market swings are a natural part of the journey, but they can still leave investors feeling uneasy. In times of volatility, staying grounded with a few key reminders can help put short-term movements into long-term perspective. Here are some strategies to help you stay focused on the long-term:
1. Keep Your Eye on the Horizon
When you invest, you can expect that both ups and downs will be part of the ride. Decades of stock market returns demonstrate how often declines can happen. For evidence, look at the largest intrayear declines for the US stock market in every year from 1979 to 2023. Those declines average to -14%. However, 37 of the past 45 calendar years have ended with positive returns for the US stock market (see Exhibit 1). So instead of getting anxious over a near-term drop, keeping an eye on the horizon can help investors keep the queasiness at bay.
Exhibit 1
US Market Intrayear Gains and Declines vs. Calendar Year Returns
1979–2023
2. Stay in Your Seat
When the stock market drops precipitously, or headlines speculate it might, it can be tempting to jump out of the market to try to avoid (further) losses. But just as roller-coaster riders are warned to keep their seat belts fastened and stay seated, investors may be well advised to do the same.
Attempting to time the market to avoid the worst days could cause an investor to miss out on some of the best days (see Exhibit 2). Consider that $1,000 invested in the S&P 500 Index back in 1990 would have grown to $27,221 by the end of 2023 if left untouched. However, if an investor had pulled their money out and missed the single best day over the more than 30-year period, their ending wealth would be reduced by nearly $3,000. Worse, if an investor had missed the five best single days, their ending wealth would be reduced by more than $10,000. Over the course of decades, even a few days can make a big difference.
Exhibit 2
S&P 500 Index Performance Based on Time in the Market
1990–2023
Taking a step back from the current moment may provide investors helpful perspective and put fears at ease. Markets have marched upward through the decades, even amid concerning world events, and rewarded disciplined investors over time (see Exhibit 3). This reminds investors that, despite the extreme headlines and bumps experienced in the short term, you may have a better ride by staying in your seat.
Exhibit 3
Growth of a Dollar—MSCI World Index (Net Dividends)
1970–2023
3. Know Your Thrill Tolerance
The same way theme-park goers can choose rides that align with their thrill tolerance, investors can choose an asset allocation that aligns with their risk tolerance. Financial advisors can play a key role in helping you do just that—by exploring your investment objectives and time horizons, and helping you build a diversified portfolio with the appropriate level of resilience (see Exhibit 4).
Exhibit 4
Stock-Bond Asset Allocation Performance
1985–2023
Investing doesn’t have to be a harrowing, white-knuckle experience. A few simple reminders and the help of an investment professional can give you the confidence to ride out the rough patches.
Footnotes
- The Dimensional Core Market 100/0 Index Allocation combines the following indices: Dimensional US Core Equity Market Index, Dimensional International Core Equity Market Index, Dimensional Emerging Markets Core Equity Market Index, and the S&P Global REIT Index (gross dividends).
- 80% of the weight is allocated to the Dimensional Core Market 100/0 Index Allocation, and 20% of the weight is allocated to the following indices: Dimensional Short-Term Extended Quality Index (10%) and Dimensional US Core Fixed Income Index (10%).
- 60% of the weight is allocated to the Dimensional Core Market 100/0 Index Allocation, and 40% of the weight is allocated to the following fixed income indices: Dimensional Short-Term Extended Quality Index (25%) and Dimensional US Core Fixed Income Index (15%).
- 40% of the weight is allocated to the Dimensional Core Market 100/0 Index Allocation, and 60% of the weight is allocated to the following indices: Dimensional Short-Term Extended Quality Index (40%) and Dimensional US Core Fixed Income Index (20%).
- 20% of the weight is allocated to the Dimensional Core Market 100/0 Index Allocation, and 80% of the weight is allocated to the following indices: Bloomberg US TIPS Index (10%), Dimensional US Ultra-Short Fixed Income Index (10%), Dimensional Short-Term Extended Quality Index (50%), and Dimensional US Core Fixed Income Index (10%).
- The Dimensional Core Market 0/100 Index Allocation combines the following indices: Bloomberg US TIPS Index (20%), Dimensional US Ultra Short Fixed Income Index (20%), and Dimensional Short-Term Extended Quality Index (60%).
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Source: DFA Investing Can Be A Roller Coaster: Three Tips for Riding Out the Ups and Downs
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