As coronovirus is spreading, market volatility is rising. Investors are selling their stocks out of panic, but history teaches us they shouldn't.
Market volatility has been high since Feb. 24. Stock indices went down, then up, then down again to finish up on Friday.
The Dow Jones closed down 257 points, or nearly 1% on Friday, but managed to end the week up 1.8%. The S&P 500 finished down 1.7% but rose 0.6% during the week. The Nasdaq Composite fell 1.9% on Friday but gained 0.1% for the week.
Despite a rebound in recent sessions, the three indices remain in correction territory. A correction occurs when an index drops 10% below its last peak.
The VIX Volatility Index (VIX). It’s a measure of market volatility and a gauge of investor fear over the next 30 days. It tends to spike during periods of uncertainties in the market.
On Friday, VIX reached almost 55, its highest since March 6, 2009. This was the day when the financial crisis reached its peak, and the bear market was at its worst. Worth noting, the VIX moves inversely to the S&P 500 about 75% of the time. So when the VIX is rising, stocks usually go down.
People fear the unknown. Experts don’t know how far coronavirus will spread and how much damage it will ultimately cause, both to health and to the economy.
Due to the uncertainty of the impact coronavirus will have on the economy and how long it will last, investors put their money in safe-haven assets.
Purchases of U.S. Treasury bonds skyrocketed, and the 10-year yield fell below 0.7% to a new record low on Friday. The 30-year Treasury bond yield hit 1.26%, also a record low. The 10-year yield drops when investors buy government bonds over worries about a weaker economy and inflation. It was 1.90% at the start of the year before the virus fear spread.
As the market volatility we saw in the past few days shows, investors don’t know how to react to coronavirus.
Fear is driving the markets. Unaware of how much the epidemic will worsen, some investors panic and sell. They don’t act rationally. It’s tempting to sell all of your stocks during a period of high volatility, but it’s not the best move.
According to S&P and BofA Global Research, investors who held on to their stocks and waited for the market to rebound had significantly higher total returns (14,962%) than investors who missed the S&P 500’s ten best days per decade (91%) since 1930.
Selling because of panic lock in losses but also exposes investors to the risk of missing the best days. As the best days generally follow the worst days for stocks, you could miss them if you get out of the markets and come back too late.
Trying to time the market isn’t the best strategy to make money in the long run. Even professional investors struggle to determine whether markets will go up or down.
By looking at the Dow Jones’ returns since Feb. 24, we can see that investors who sold their stocks before Mar. 3 missed the rebound on Mar. 3-5.
If market volatility is giving you anxiety, instead of selling all of your stocks, you could sell a portion of your equities to invest in safer assets. If you see a stock at a level you like, you could take a small position and see how things turn before buying more. History tells us that investors shouldn’t panic during periods of volatility.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.