Focusing on Your Strategy During Turbulent Times
Concerned about your investments? Market volatility can be confusing…and scary.
If investing makes you queasy, does that mean it’s time to get off the rollercoaster? When the markets fluctuate significantly, what should you do?
Ideally, in a down market, one can seize the potential opportunity to purchase “discounted” stocks – the old “buy low, sell high” strategy.
Buy low and sell high — why is it that so many investors do the opposite?
Investors are human, and humans aren’t very good at separating their emotions from their investment decisions. Instead, it can lead to buying when optimism is on the rise, but then selling when nervousness turns to fear, which can result in making poor decisions at the worst possible times.
Across the 30 years ended December 31, 2018, the Standard & Poor’s 500 posted averaged annual return of 10.0%. During the same period, the average mutual fund stock investor realized a yearly return of just 4.1%. Why the difference?
The 2008–09 global financial crisis offers an example of how an emotional cycle can affect an investor’s decisions. After experiencing fear during the 2008 downturn, some investors fled the market in early 2009, just before the rebound began. They locked in their losses and then experienced the stress of watching the markets climb, uncertain when it was safe to “jump back in,” resulting in real, not paper, losses.
Staying disciplined through rising and falling markets can pose a challenge, but it increases the chances for long-term success.
Beware of these investor behaviors that can derail your long-term success:
- Investors can be overly focused on day-to-day returns. In the long run, an investor who glances at a portfolio once per quarter may end up making more progress toward his or her goals than one who anxiously pores over financial websites each day.
- Too many investors make quick, emotional moves when the market dips. Logic may go out the window when this happens, in addition to perspective.
- Investors who care too much about day-to-day market behavior may practice market timing, which is as much hope as strategy. To make market timing work, an investor has to be right twice. The goal is to sell high, take profits, and buy back in just as the market begins to rally off a bottom. But there is volatility in financial markets and the sale at any point could result in a gain or loss. And markets move too quickly to “catch” the low point.
- Investors who alter their strategy in response to the headlines may end up changing it again after reading additional headlines. While they may expect to be on top of things by doing this, their returns may suffer from their emotional and impatient responses.
What’s the right thing to do?
The truth is there’s no pat answer to that question. Everyone’s financial situation varies according to their time horizons, their goals, their risk tolerance, and so on. But there are a few tips that apply to all investors:
Be wary of headlines or the advice of well-meaning friends.
The biggest mistake some investors make is simply basing their decisions on headlines or listening to the advice of friends. Headlines could be misleading (and they change daily), and friends may have the best of intentions, but you can’t always be sure that their advice is backed by actual data or knowledge. Uninformed decisions may prove to be costly in the long run.
Nobel Laureate economist Gene Fama once commented: “Your money is like soap. The more you handle it, the less you’ll have.” Wisdom that may benefit your strategy, especially during periods of market volatililty.3
Do you need advice on how to deal with your current investments in this volatile market climate?
Would you have done anything differently in 1999 and 2007? This may be your third chance to protect your portfolio. There’s a way to ride through the volatility with greater financial confidence and a strategy designed to enhance performance.
At Brightview Financial, we can help you take a long-range approach to wealth building and asset management in line with your tolerance for risk, your long-range investment goals, and your time horizon to retirement and other financial objectives.