The news surrounding market volatility is almost enough to make one bolt under the bed, never to invest again. The headlines often speak of “roller coasters”, “turbulence” or “markets getting roiled”. Even colleagues of mine will begin to question their investment plan, and they are all trained to know better.
Market volatility is the new normal. What does that mean exactly? Days of market ups and downs are here to stay. I promised to cover Five Secrets of Successful Investors in greater detail this year, and today I’m going to talk about market bumps (a.k.a. volatility). What we know is that the wider the swings in the price of an investment, the harder it is not to worry. None of us like the prices of our investments to bounce around. Yet that is exactly what they do.
A way to handle the uncertainty is to think about not cashing out or staying on the sidelines. Instead, you should consider the following:
- Stick to business as usual. My colleague Russ Koesterich encourages investors to resist the urge to exit, as avoiding the markets can cost you over time. Over the past 2 decades, the S&P 500 provided an annual return of 9.25%, but the average stock fund investor took home just 5% – a little more than half (Source: Dalbar and Bloomberg). Why is that? It is because we often see investors coming in and out of the market, driven by an emotional reaction to normal gyrations. It’s not a good idea to react to a down day on the market by converting everything in your portfolio to cash. If you do, odds are you’ve just taken a loss on all of your investments. What’s more, it can be very difficult to know exactly when to hop back in – and staying out means losing out on potential gains when the market does go up again.
- Buy “on sale”. Russ K. touts stock market pullbacks as buying opportunities for long term investors. Think of it this way: it’s like having your eye on a coveted coat for months. Yet when it goes on sale, you don’t buy it. Instead you wait for it to return to full price, or even increase in price, and then you make the purchase. It sounds silly but this is often what investors will do. Buying when others are selling means taking contrarian action, which can be hard. Staying calm and keeping your head in times of market uncertainty isn’t easy, but buying in when stocks are at a discount, and putting your cash to work, makes good financial sense.
- Keep your eyes on the prize. I can’t stress enough how important it is to tune out the noise and keep focused on what you ultimately hope to accomplish. Remember: long term, the market is your friend and while you can’t control what tomorrow brings, you are in control of your finances. If you know you are prone to be a jittery investor, choose well diversified mixes of investments such as exchange traded funds (ETFs) which typically seek to provide market returns and may be less volatile than other investment options. Bottom line: Consider staying invested for the long haul and don’t let today’s distractions derail your strategy.
In my next post, I’ll cover the next point of The List: how (and why) to diversify – for real.