Last week’s market decline continued today, as the Standard & Poor’s 500 stock index fell .6%, to 1,989.63. Today’s losses, in which all 10 sectors in the index lost ground, followed a 3.5% decline in the index last week. That was the index’s largest decline since May 2012.
Sharp little shocks like this are the stuff that test investors’ mettle. It’s tempting to pull money out of your portfolio until the market recovers, or, conversely, to load up on stocks that have suddenly gone “on sale.”
But impulsive, adrenaline-fueled investing decisions typically end up backfiring. Trying to jump in and out of the market as it rises and falls is one of the very best ways to lose your way quickly and get knotted up with doubt and losses.
No one has a working crystal ball, so no one knows when the market will stabilize. What we can say for certain is that as long as the market exists, it will experience lots more ups and downs. And that means there will always be a siren song to sell or buy as conditions change.
The single best way to resist that siren song is to tie yourself to the longer-term perspective of a plan, whether it be an investment plan, retirement plan or financial plan. Decide, preferably with a qualified financial advisor’s help, what your goals are, when you want to reach them, and how much risk you’re willing to take to get there and develop a plan.
If your portfolio is built appropriately, it will help make you a more confident and stable investor. Think of your portfolio as a ship designed to carry you to the destination of your choice. Just as ships are constructed to withstand the storms that inevitably occur during voyages, your portfolio should be built to ride through the market’s inevitable volatility.
It’s also important to remember that volatility is different from risk. Indexes have always bounced up and down over the course of long-term growth, and they’ll continue to do that. But especially if you have a long investment time horizon—10, 15, 20 years or more—it should become clear to you that short-term bounces are different and less important than long-term results. Understanding that your investment (not retirement) time horizon is much longer than the short-term bounces can really help put the market’s short-term ups and downs into perspective for you.
If you have a plan, you will be better able to resist obsessing over week-to-week or month-to-month market bounces. Obsessing is only likely to trigger the adrenaline that leads to fuzzy thinking and poorly-timed decisions.
If you would like help getting organized, developing a plan that fits you and building a portfolio of investments to match your plan, we may be able to help. That’s just part of what we do.