As the markets continue to fluctuate and worry extends beyond your investments, I want to take a few moments and talk about emotions, investing and your portfolio.
While no one likes seeing their account balances fall, this is a very natural component of investing. Investing in capital markets carries a level of uncertainty. If it were certain, it would be called a savings account and not an investment account.
To compensate an investor for placing their money in something that is uncertain, one would expect to earn a higher rate of return than other "safe" savings alternatives such as certain bank, insurance, or fixed income products.
Some of the core challenges many retail investors face is patience & discipline. It is easy to allow fear to overpower common sense when it comes to our money. When you have a short time horizon, you become a trader and not an investor. Trading makes an individual very vulnerable to losses because you ultimately have a 50/50 chance of getting the trade right. Remember, trading is a zero-sum game and for every winner there needs to be a loser.
As you know, we are not a firm of traders, but one who believes in long-term investing and the power of capital markets to grow wealth. Let’s address concerns about long-term investing.
While most investors understand that markets go up and down (just look at the last two days), there is a tendency to feel the fear and worry in a decline more than the certainty and excitement of an upturn.
This is also fueled by constant market alerts, the 24-hour news cycle, and breaking headlines.
This causes investors to think they should leave the market when it is down and get back in when it goes up.
However, without a crystal ball, do you know when the market will go up?
According to a University of Michigan study, 96% of market gains occurred in .9% of trading days from 1963 through 2004.
That’s almost all of the market gains in only 135 days of the market.
But do you know what days to get back into the market?
Despite periods of short-term decline, the market’s recovery over the long term has rewarded those who remain invested.
Let’s take a look at two recent downturns.
March 24, 2000 – October 9, 2002: A 31-month downturn with a -49.1% decline.
However, this was followed by a 1-year 33.7% return and 101.5% five years later.
Then again between October 9, 2007 – March 9, 2009: This time a 17-month downturn with a -56.8% decline.
And again, this was followed by a return of 68.6% just 1 year later and 178.0% five years later.
Each fully rebounded but did so in their own time.
Since nobody has a crystal ball, we can’t predict the perfect time for getting in and out of the market.
Even missing just a few of the top days in market returns, could have a disastrous impact on your investment portfolio.
So what should you do?
Be patient, stay the course, and know for every significant downturn, historically there is an even more significant upturn around the corner. We saw it in the late 80's, early 2000's, again in 2008/2009 and there is nothing to believe that 2020 will be any different.
My main recommendation to you is to temporarily disconnect from the financial media. Go spend time with your loved ones and enjoy life to the fullest!
If you would like to talk about your individual situation, I highly encourage you to schedule a call by clicking here.
Dave Alison CFP, EA
Founder & CEO