In Volatile Markets, Keep Your Bearings and Stay on Plan
“In volatile markets, keep your bearings and stay on plan.” That’s always our guidance to clients when markets become unsettled, either to the upside or the downside. As of today, the S&P 500 has lost 17.7% in the five and one-half months since the beginning of the year. The markets are unsettled and so are investors.
The sharp shocks of current volatile markets like this are part of the long term investing experience. It is the stuff that tests investors’ mettle. It’s tempting to pull money out of your portfolio until volatile markets recover, or, conversely, to load up on stocks that have suddenly gone “on sale.”
It’s not meant to sound trite, but be a rational reminder, that the world doesn’t come to an end during extreme market selloffs and trees won’t begin growing endlessly into the sky during extreme market rallies.
And impulsive, adrenaline-fueled investing reactions and 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 doubts and losses.
In Volatile Markets, Keep Your Bearings and Avoid Experiencing a Behavior Gap
It’s well-documented that investor behavior will very likely have the largest impact on an investor’s long-term investment results, and success or failure in meeting an investor’s financial goals and objectives. And it is during market extremes that the potential runs high to lose our bearings, abandon a well-conceived long-term investing plan, and experience a costly behavior gap.
So, in volatile markets, keep your bearings and stay on plan.
No one has a working crystal ball, so no one knows when volatile markets will stabilize. What we can say for certain is that as long as markets exists, they will experience a lot 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 well-conceived plan, whether it be an investment plan, retirement plan or financial plan. Acknowledge the nature of volatile markets and 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 capable and willing to take to get there, and then develop your long-term plan together.
If you know your portfolio is built appropriately for volatile markets, within specified and measurable risk and diversification budgets, it will help you be 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. Markets 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-term 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 time horizon is much longer than the timeframes of the short-term bounces can really help put the market’s short-term ups and downs into perspective for you. And of course, it’s also very important to remember and not confuse that your investment time horizon may well be 20 to 30 years beyond your retirement time horizon, perhaps even farther.
If you have a plan, you will be better able to resist obsessing over the monthly, quarterly or annual market bounces. Obsessing is only likely to trigger the adrenaline that leads to fuzzy thinking and poorly-timed decisions.
If you would like help developing a long-term investment plan that fits you and help building and managing a portfolio of investments to match your plan, we may be able to help.