Why investors should always brace themselves for sudden market drop

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A good reminder is the oft-used cliche that “time in the market is more important than trying to time the market”.

A good reminder for investors is the oft-used cliche that “time in the market is more important than trying to time the market.”

Stocks rose two days later after key economic data bolstered speculation that the US Federal Reserve will be ready for a rate cut in September. But the turbulence has crystallised anxiety that the latest bull run, fuelled by Nvidia Corp and a handful of other stocks, could be running out of steam. Investors have to remember that market drops are “completely normal” and that they “shouldn’t let short-term volatility dictate your long-term investment strategy”, according to Mr Dave Alison, of Alison Wealth Management.“These volatile times in the market could be a good time to do a strategic rebalance of a portfolio, taking gains from investments that have had good growth and reallocating to underweight positions,” Mr Alison said.

For those investing with exchange-traded funds, Mr Pride would favour ETFs tracking the S&P Small-Cap 600 Index, which has a profitability requirement for inclusion in the index, versus an ETF tracking the Russell 2000, which does not have a similar bar. The investor who remained invested through thick and thin had, with dividends reinvested, a hypothetical US$1.1 million. Meanwhile, investors who sat out the best five, 10, 30 or 50 days had returns that were 38 per cent, 55 per cent, 84 per cent and 93 per cent lower, respectively.

 

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