Putting Market Volatility into Context

The following commentary was first published by RBC Global Asset Management in a report titled Looking Beyond the Clouds.

The situation surrounding the Covid-19 pandemic continues to evolve quickly. Amidst recent volatility, it's undoubtedly been a difficult time to be an investor. Not only do you have to worry about the value of your investments fluctuating, but you're also facing concerns about your family's and your personal health.

A look at the forecast

At times like these, it's challenging to ignore the noise. With markets focused on the latest Covid-19 developments, the short-term outlook is cloudy. However, what's often overlooked at times of heightened uncertainty is the long-term outlook – which often becomes clearer for investors.

Amidst recent uncertainty, the S&P 500 has declined roughly 30% from the all-time high it set on February 19, 2020. While the speed of the pullback has been fast, the depth of the drawdown is by no means unprecedented. In fact, dating back to 1950, the broad U.S. equity index has experienced five other pullbacks of at least 30 per cent. And, the forward looking returns from these points in time have represented fruitful opportunities for investors. While it's quite possible the volatility may continue as the market wrestles with the uncertainties related to Covid-19, a focus towards the long term can help keep things in perspective.

Behavioural economics plays a role

From the field of behavioural economics, the concept of loss aversion states that individuals would rather avoid losses than acquire equivalent gains. As a result, when you see the value of your investment portfolio decrease, it can trigger fear, making the decision of staying invested more challenging. In these situations, it's important to look beyond the recent volatility by asking yourself how you would invest your money today if all your assets were sitting in cash. With this as the starting point, it becomes easier to lay out the best investment plan for you moving forward.

The challenge is to see past today's clouds to have an eye on tomorrow's opportunities. As Wayne Gretzky so eloquently put it – "skate to where the puck is going to be, not to where it has been."

For a roundup of coronavirus coverage, plus timely reminders and tools that can help when markets are volatile, click here.