During volatile times in the market, it’s not uncommon to be concerned about your investment strategies. These are a few points to help avoid common mistakes and stay on track.
Declines are historically common and temporary
Problem: Declines can cause imprudent behavior by filling investors with dread and panic.
Solution: Realize that declines are inevitable and have not lasted forever.
History has shown that stock market declines are a natural part of investing. While declines have varied in intensity and frequency, they have been somewhat regular events.
A decline of 15% (like we’re currently seeing), for example, historically happens every 2-3 years.
Proper Perspective Can Help You Remain Calm
Problem: Studies show that people place too much emphasis on recent events and disregard long-term realities.
Solution: Even amid a market downturn, remember that stocks have rewarded investors over time.
The stock market has a reassuring history of recoveries. After hitting lows in August 1939 and September 1974, the Standard & Poor’s 500 Composite Index bounced back strong, averaging annual total returns of more than 15% over the next 10 rolling 10-year periods in both cases.
Long-term investors have been rewarded. Even including downturns, the S&P 500’s mean return over all rolling 10-year periods from 1937 to 2017 was 10.43%.
Don’t Try to Time the Market
Problem: Research has shown that losses feel twice as bad as gains feel good.
Solution: Keep in mind that fleeing the market to reduce losses could mean losing out on gains when stocks recover.
The market has shown resilience. Every S&P 500 downturn of about 15% or more since the 1930s has been followed by a recovery.
Recoveries have been strong. Returns in the first year after the five biggest market declines since 1929 ranged from 36.16% to 137.60%, and averaged 70.95%. Over a longer term, the average value of an investment more than doubled over the five years after each market low.
Don’t miss out on potential market rebounds. Although recoveries aren’t guaranteed, taking your money out of the market during declines means that if you don’t get back in at the right time, you’ll miss the full benefit of market recoveries.
Emotions Can Cloud Your Judgment
Problem: Investors often make poor decisions when they let their emotions take over.
Solution: Stay focused on your long-term goals and carefully consider your options.
Have you heard the investment adage, “buy low, sell high”? Strong emotions during market swings can tempt you to do the opposite – buy high and sell low.
You may also feel that doing something – anything – during a downturn is better than doing nothing. Although inaction might seem counterintuitive, staying invested in the market could be the better choice.
We account for these declines in your plan
We know these declines are to be expected from time to time and we account for them in your financial plan. By focusing on maintaining appropriate risk levels in your short, mid and long-term buckets, we work to reduce the risk that you’ll need to pull from your more growth-oriented funds in the short run.
We also read and listen to experts in many different capacities. If you’re interested in digging deeper, here’s an article and video commentary from City National Rochdale that details some of the more technical aspects to the current economic condition.
And, remember, we’re here for you!
We’re here to talk through concerns and questions you might find yourself thinking about. Maintaining sound strategy is often most difficult during volatile times. However, by keeping the big picture of your goals in mind, together we can effectively make decisions to help keep you on track.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.