Over the past few months, investment markets have responded strongly to political events around the world, not least the escalating tariffs implemented by the US.

Since Donald Trump’s return to office in January, headlines have been dominated by details of new trade charges, which our new article covers in far more detail.

Read more: Will you be affected by tariffs?

A significant effect of these tariffs has been a rise in stock market volatility. According to RTÉ, on Thursday 10 April:

• The S&P 500 fell by 3.5%
• The Nasdaq dropped 4.3%
• The Dow Jones Industrial Average was down 2.5%.

It’s easy to become absorbed in news like this, especially since you have access to a wealth of information at the touch of a button these days.

While staying informed is invaluable, the sheer volume of this “noise” can often cloud your judgement – particularly when your hard-earned wealth is on the line.

When this uncertainty sets in, you may experience an instinctive response to sell your investments or move them into “safer” cash holdings. Yet, this approach could actually hamper your progress towards your long-term goals.

Continue reading to discover why taking a step back and maintaining a long-term perspective could help you avoid market pessimism.

“Loss aversion” could make market decline seem worse than it actually is

If you constantly track the performance of your portfolio, you are more likely to be emotionally affected by short-term fluctuations and volatility.

One reason for this is “loss aversion”, a behavioural bias that causes you to experience the pain of loss twice as strongly as the pleasure of gains.

Say, for example, someone offered you a choice: a guaranteed €10 or a 50% chance of receiving €100. Due to loss aversion, you might find that you instinctively take the €10, even though you could receive a higher amount by taking on an element of risk.

When you’re investing, loss aversion might make you feel as though you should abandon your assets in favour of cash during periods of short-term volatility.

While this might seem like the safer option, remaining invested despite these fluctuations should more significant returns than cash over the long term.

Even though past performance doesn’t indicate future performance, data from Visual Capitalist shows that since 1970, cash has proved far less lucrative over the long term when compared to other popular asset classes. While this example is US-based, global assets have followed a similar trajectory.

Source: Visual Capitalist

As you can see, while cash appears safe in the short term, the data tells a different story. Liquidating shares (or selling other assets) due to a fear of volatility may harm your wealth in the long run.

Investing with a time frame of at least five years, and ideally a minimum of 10 years, could give your portfolio enough time to recover from periods of downturn and benefit from future growth. Adopting this strategy might offer you peace of mind and help you to avoid falling into a pessimistic mindset.

Staying invested through periods of volatility might be the wisest choice

While volatility is an inherent part of investing, even the most seasoned investors can feel anxious during a market decline.

You may experience a sudden temptation to sell after a dip and then purchase investments back at a lower price. This might be unwise though, as the phrase “time in the market, not timing the market”, exists for a reason.

Research from Visual Capitalist shows that, over the last 20 years, 7 of the 10 best days for the US S&P 500 have occurred during bear markets (in other words, when stock values are falling).

Moreover, many of the index’s best-performing days seem to happen shortly after its worst. For example, the S&P 500’s second-best day in 2020 came immediately after the second worst.

Similarly, 2015’s best-performing day occurred only two days after its worst.

By selling your investments during periods of volatility, you might miss out on some of these best-performing days, and the effects of doing so can be significant.

The table below shows how your portfolio might be affected by missing some of the market’s best days based on a hypothetical $10,000 investment in the S&P 500 between 1 January 2003 and 30 December 2022.

Source: Visual Capitalist

As you can see, if you had missed just 10 of the best days in the market because you’d moved to cash during a downturn, annual returns on your initial $10,000 investment would be worth around $35,000 less than if you had remained invested.

If you missed the best 60 days, your investment would be worth almost $60,000 less after 20 years.

Since accurately timing the market is almost impossible, staying invested through volatile times should help you benefit from periods of recovery, bolstering the overall value of your portfolio.

We can act as a sounding board, helping you avoid making emotional investment decisions

Focusing on your long-term plan while avoiding market noise and pessimism is easier said than done. Even if you’re the most steadfast person, you may still feel concerned when you witness the value of your portfolio fall.

This is where a financial planner could offer value. We have years of experience dealing with market fluctuations, and our financial planners can help you establish and focus on your goals for the future.

We don’t just help you to manage your assets, but also support you in tempering your emotions, particularly during times when uncertainty is at its highest.

By acting as a sounding board, we could help you avoid behaviour that would derail your progress towards your long-term goals.

If you’d like some of this invaluable support, please email us at clients@iqf.ie, or call 353 71 915 5560.

Please note

This article is for information only. It does not constitute advice.

It describes financial planning services that iQ Financial can offer to you. Financial planning services are not regulated by the Central Bank of Ireland.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.