The recent slide in the stock market should not be a surprise to anyone. Since the epic decline during the financial crisis 10 years ago the stock market has gone almost straight up more than tripling in value. The fact that it’s been a great run and investors have done well doesn’t give you any comfort when the market loses 800 points in one day.
Is the current market weakness going to turn into an extended downturn? Is this the beginning of another financial crisis and should you get out of the market now while you still have some money left? These questions naturally go through your mind when the market is volatile.
Everyone is a genius when the market is going straight up but what you do during periods of market volatility will determine how successful you are. Following your emotions and your gut feelings may work out for you in other situations in your life but they are extremely destructive when you apply them to your investments.
Emotionally you may feel fear and get scared that you are “losing” money. The natural reaction is to pull away from the source of that fear and pain just like you would if you accidentally touched a hot stove. You know for a fact that the stock market is volatile and will at times go down and eventually go back up. But your fear many times overcomes logic and a knee jerk reaction causes you to sell all or a substantial portion of your stock investments.
If you are not comfortable with the volatility in the stock market and you cannot focus on the long term you shouldn’t be investing in stocks at all. Because if you jump in and out of the market based on what you think the market is going to do in the future you will make the wrong decisions at the wrong time and you will consistently lose money. I continue to talk to people who were scared out of the market when it was low in 2008 and never got back in. These same people got scared out in 2000 lost money and got back in in 2006 right before they lost money again. Buying high and selling low is not a good investment strategy.
The common wisdom of the investing public and some financial advisors is that there are people out there that can read the economic and political tea leaves and predict what the stock market is going to do and when. This is not hard to believe because these “experts” are everywhere and. they sure sound like they know what they are talking about. The truth is that no one can consistently predict the future of anything let alone the future price of the stock market. Don’t fall into their trap.
So how can an investor navigate the ups and downs of the stock market without making big mistakes? There are two things you need to do. You must know yourself and you must take a long term view.
Knowing yourself is extremely important. Positioning your investments to reflect your situation and feelings about risk will allow you to ride out the stock market storms. The key is to only put money in stocks that you will not need for at least 7 years and only put an amount in stocks that if the market was to go down 20% or more you could still sleep at night. For most people there is an amount that they could set aside in growth investments for the long term and not touch. .
Taking the long term view of stocks is also vital to successful investing. Everyone knows that the stock market can be volatile. But that’s only in the short run. Over days, weeks months or even a few years the market can go down dramatically. But over the last 90 years the S&P 500 has had an annualized average return of 9 to 10 percent. If you can just manage to stay in the market with whatever portion of your investments you decide to dedicate to growth you can be a successful stock market investor.
Bill Oldfather is a fee-only financial planner and investment advisor. Oldfather Financial Services is an SEC Registered Investment Advisor based in Kearney NE. Email to bill@oldfatherfinancial.com