The recent market volatility has caused a rise in emotions among investors. As a Financial Advisor in Murfreesboro, TN, we've had significantly more conversations with clients on the topic of market volatility recently. A Financial Professional can provide guidance and a voice of reason during a fearful time. You wouldn't be human if you didn't have concerns and fear loss. It's natural instinct to attempt to "fix" the impact of losses by fleeing the market during downturns, just as greed prompts people to return to the market when doing well, both can have negative impacts. To help combat the urge to make emotional decisions, consider these five fundamental principles of investing.
1. Market declines are part of investing
History shows us that stocks move steadily higher over long periods of time. However, stock market declines are an inevitable part of investing. Although past results are not predictive of future results, each downturn has been followed by a recovery, and over time, a new market high. Although it's difficult to not be consumed by the current news headlines and global challenges, it's comforting to know that market downturns happen fairly frequently, but don't last forever.
2. Time in the market matters, not market timing
Since no one can accurately predict the short-term market declines, it's best not to sit on the sidelines. A study provided by Russell Investments shows in each ten year period since 2001, whether you invested with a lump sum or periodic contributions, perfect timing or the worst timing, the results of investing are better than holding cash. Historically, every S&P 500 decline of 15% of more from 1929 through 2020, has been followed by a recovery. The average return in the first year after each of these declines was 55%. Therefore, even if it appears that you're investing at the worst time, even missing out on a few trading days can take a toll on your investment.
3. Emotional investing can be hazardous
2022 Nobel Prize recipient in 2002, Kahneman performed work in behavioral economics to discover that people often act irrationally when making financial decisions. It's perfectly normal to feel nervous when markets decline, but it's the actions during such periods that can impact success versus a shortfall. To best keep the emotions at bay, consider returning your mindset to the fundamentals of investing and your long term goals. A change in mindset to remove the emotion can often discourage irrational decision-making.
4. Make a plan & stick it out
Helping clients to discover their goals and creating thoughtfully constructed plans to achieve them helps to avoid making short-sighted investment decisions. As nerves flare, we return to the plan to determine if changes are necessary based upon short and long-term goals, risk tolerance, and time frame.
Dollar cost averaging, or making ongoing, consistent contributions, is a method that is often use to avoid futile attempts to time the market. This allows contributions to be made on a regular basis, whether the market is trending downward or upward. Although dollar cost averaging does not ensure a profit or prevent loss, it provides a consistent reminder of the plan, the goals, and the pathway to achieving them.
5. The market tends to reward long-term investors
There would be no complaints with a 30% annual return, but it's not reasonable. There is no doubt that stocks have moved lower so far in 2022. However, it's not expected to necessarily be the start of a long-term trend. Stocks rise and fall in the short-term, but they have tended to reward investors over longer periods of time. Even including downturns, the S&P 500's average annual return over all 10-year periods from 1937-2021 was 10.57%.
Although it's natural for emotions to bubble during volatile times, we encourage tuning out the news headlines and focus on long-term goals. As a Financial Advisor in Middle Tennessee, we help clients to create and stick to long-term financial plans. Although the market volatility has been an increasing topic of conversation this year, we educate and guide clients through times such as these so that we remain focused on a bright future. If we can help you, please contact us!
Russell Investments & Morningstar. Note that one year represents a 12-month period ending December 31st. Assumes an investment of $12,000 per year into a hypothetical S&P 500 Index portfolio with no withdrawals between Jan 1stst and Dec 31st. Cash return based on return of $12,000 invested each year in a hypothetical portfolio of 3-month Treasury bonds represented by the FTSE Treasury Bill 3-month Index without any withdrawals between Jan 31st and Dec 31st. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Hypothetical analysis provided for illustrative purposes only.