During volatile times in the market, it’s common to be concerned about your investment strategies, wondering how you’ll recover. We know that dealing with volatility is part of the life of every investor, but it certainly doesn’t make it easy when the market is down 10%, 20%, 30% or more. However, we’ve found that a few timeless principles can help avoid common mistakes and keep your strategies on track to meet your goals.
1. 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 don’t last 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, as we discuss in Market Declines: What We Can Learn from History.
2. Proper Perspective Can Help You Remain Calm
Problem: We’re all subject to recency bias, the tendency to place too much emphasis on recent short-term events and disregard long-term evidence.
Solution: During 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%. Changing your portfolio with your life rather than short-term events is one of Craig’s 12 Lessons Learned from Investing for 50 Years!
3. Don’t Try to Time the Market
Problem: Research has shown that losses feel twice as bad as gains feel good, which can lead us to want to move to safety during tough market times.
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 strong recovery. Returns in the first year after the five biggest market declines since 1929 ranged from 36.16% to 137.60%, averaging 70.95%. Over a longer term, the average value of an investment more than doubled over the five years after each market low. 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, as we discuss in Time in the Market Is Better Than Timing the Market.
4. Emotions Can Cloud Your Judgment
Problem: We’re all at risk of making poor decisions in times of high emotion, one of the 5 Mistakes People Make in a Recession or Market Correction.
Solution: Stay focused on your long-term goals and make a “dealing with a decline” game plan ahead of time. 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, you 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.
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.