Panic & Greed Aren't Investment Strategies: How to Stay Calm When Markets Are Not
Stock prices don't simply go up uninterrupted forever. Market volatility makes everyone uneasy, but it's a normal aspect of long-term investing.
What matters more than market volatility is how you respond to it.
We will ALL see several market declines throughout our lives, however, our investing principles and goals shouldn't change based on the inevitable ups and downs of the market. During periods of market volatility, here are some basics to help keep you on track:
1) Resist the urge to sell holdings based on recent market movement. Selling when there's a drop makes temporary losses permanent. If you are selling high quality holdings when they are down due to market movement, you've essentially done the exact opposite of "buying low and selling high."
Also, during times of market volatility, there could be a temptation to take on even MORE risk when markets are down in the hopes of getting a larger pay off. It's enticing, but very few people effectively "time" the market...and, let's be honest, you're probably not one of them. Don't react emotionally to dramatic short term shifts in the market, or you're likely to be disappointed.
You are better off making sure you have a properly diversified portfolio preceding a downturn in the market, however, market changes can skew your portfolio from its original allocation, so...
2) A portfolio rebalance may be needed. "Rebalancing" means selling holdings that have become overweight and moving proceeds to holdings that have become underweight. It's a good idea to do this routinely.
3) Take defensive steps in your portfolio: Consistently review your risk tolerance to make sure that your portfolio aligns with your long term goals, income needs and comfort level with downside possibilities of your holdings. Everyone is confident when markets are up, but what is your level of comfort when markets are down? And for how long could markets be down...A few days? One week? 6 months? A year? You need to make sure your portfolio aligns with your risk tolerance and also your time frame for various investment goals. You also need to review how much cash you keep on hand to make sure you always keep enough for emergency expenses. You do not want to have to sell out of investments when they are down just to meet your ongoing income needs. Conservative holdings like treasuries or bonds can also help stabilize downside risk when stocks are falling.
4) Bear markets are historically short: You're likely to experience several significant declines during a long investing career, however, even bear markets (20% or more dip) have been relatively short in the grand scheme of things. Going back to 1966, the average bear market lasted a little longer than a year (505 days). The longest of the bears was roughly two and a half years (915 days), and it was followed by a nearly five-year bull run. Timing the market’s ups and downs is nearly impossible, but staying focused on your plan isn't.
Source: Schwab Center for Financial Research with data provided by Bloomberg. The market is represented by daily price returns of the S&P 500 Index. Bear markets are defined as periods with cumulative declines of at least 20% from the previous peak close. Its duration is measured as the number of days from the previous peak close to the lowest close reached after it has fallen at least 20%. In the chart, periods between bear markets are designated as bull markets. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance does not guarantee future results.
What can you do next?
1) Be prepared! Consistency is key. You can best prepare by reviewing your risk tolerance, diversifying and rebalancing your portfolio as needed and on a routine basis.
2) Focus on your long term goals. If you've built a solid portfolio and it's well-diversified, then ignore the noise and focus on what's most important to you and if you're still on track to get there.
3) Talk to us! We are happy to discuss your portfolio whenever is convenient for you. We also "stress test" portfolios that we manage in order to show you how your portfolio could behave in different market scenarios in order to give you peace of mind and help you sleep easy at night. If you need to review your plan or have any questions, we are happy to assist you.