Over 66 years historically (14 bull markets and 13 bear markets), the periods that markets went up lasted longer and had a higher cumulative return than the down periods of time. We need to have a strategy that gives a discipline to operate by. Your time horizon, goals and tolerance for risk are key factors in helping to ensure you have an investment strategy that works for you. Your time horizon is the amount of time you can keep your money invested. Your tolerance for risk should take into account your broader financial situation such as your savings, income and debt — and how you feel about it all. Looking at the whole picture can help you determine if your strategy should be aggressive, conservative or somewhere in between.
Have a personal investment strategy right for you
It is important to be comfortable with your investments. If you are nervous when the market goes down, you may not be in the right investments. Even if your time horizon is long enough to warrant an aggressive portfolio, you have to be comfortable with the short-term ups and downs you’ll encounter. If watching your balances fluctuate is too nerve-racking for you, think about re-evaluating your investment mix to find one that feels right. But be wary of being too conservative especially if you have a long time horizon because more conservative strategies may not provide the growth potential you need to achieve your goals. Set realistic expectations too, amounts of return are directly proportional to risk levels and the amount of ups and downs in your portfolio – make sure your investment strategy fits your investment temperament.
Diversify and invest regularly
One of the most important things you can do to help manage the risk of volatile markets is to diversify. While it won’t guarantee you won’t have losses, it can help limit them
If you invest regularly over months, years and decades, you can actually benefit from a volatile market. Through a time-proven investment technique called dollar cost averaging, you invest a set amount every week, month or quarter, regardless of how the market’s doing. Over the years, you’ll buy shares of each investment at varying price levels. As a result, the average price per share of your investments may be lower than if you invested all your money at once. More importantly, you avoid the temptation of trying to time the market. (Periodic investment plans do not ensure a profit or protect against a loss in a declining market.)
Don’t try to time the market
Looking back over 75 years and critical events such as the bombing of Pearl Harbor to the assassination of JFK, you can see the initial impact on the stock market. More importantly is seeing the rebound over time. Time, not timing, helps to capitalize on stock market gains. Just missing the 10 best days in a calendar year could cost you more than you can imagine. Do not try to time the market. Attempting to move in and out of the market can be costly, particularly because a significant portion of the market’s gains over time have tended to come in concentrated periods. Many of the best periods to invest in stocks have been those environments that were among the most unnerving.
When stock markets take a turn for the worse the way they have in the last month, it’s easy for investors to get overwhelmed. Perfectly rational adults with diversified, long-term portfolios are suddenly confronted with terrifying headlines, alerts and warnings. The first panicked instinct, “sell everything” without thinking, is almost always a mistake.
The last several years have provided a nearly uninterrupted bull market rally, luring investors who felt like they were missing out. We will always go through crashes. We will always overvalue stocks and then undervalue stocks and do it all over again. There’s a famous quote by Charles Mackay that illustrates this truth: “Men, it has well been said, think in herds. It will be seen that they go mad in herds, while they recover their senses slowly, and one by one.” Financial crises are hard — if not impossible — to predict. Past crises, however, can show us how to avoid falling victim to the next one. Rather than focusing on the turbulence, wondering if you need to do something now, or what the market will do tomorrow, it makes more sense to focus on developing and maintaining a sound investing plan. A good plan will help you ride out the peaks and valleys of the market, and may help you achieve your financial goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results.
Jeffery Masters, President of Jeffery W. Masters & Associates 954-977-5150.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners, a registered investment advisor. Independent Financial Partners and Jeffery W. Masters & Associates are separate entities’ from LPL Financial – [email protected]