Market volatility has increased the last few weeks in response to concerns about Chinese growth. Mohamed El-Erian believes higher market volatility—up and down—is the new norm. Liz Ann Sonders of Charles Schwab counsels investors to remain calm, and investors are reminded poor decision-making during times like these leads to underperformance.
Why higher market volatility is the new norm. The unusual volatility that has taken hold of financial markets in recent weeks will be with us for a while, according to Mohamed El-Erian, chief economic advisor to Allianz. He cites six major reasons why higher volatility—up and down—is the new norm for financial markets. The influence of these six factors is unlikely to dissipate soon.(tiered registration required)
Panic Is Not a Strategy—If markets are good at one thing, it’s remind investors that they don’t go up uninterrupted forever. The US stock market went over 2,000 trading days between its 2011 correction and the one we’re in the midst of presently. Normally, corrections—defined as declines of at least 10%–occur about once a year. This article by Liz Ann Sonders, Chief Investment Officer at Charles Schwab, serves to remind investors that neither panic nor greed is an investment strategy. The best foundation to help protect a portfolio against the unpredictable and having—and sticking with—a long-term strategic allocation plan.
Why do individual investors underperform the indexes? The biggest reason for underperformance by investors who participate in financial markets over time is psychology. Behavioral biases lead to poor investment decision-making, which is the single largest contributor to underperformance over time, according to Dalbar’s 21st annual Quantitative Analysis of Investor Behavior Study.
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