Wise words to soothe volatile times in the stock markets, from some of the best investors:
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.” — Warren Buffett
“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed.” — Benjamin Graham
“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” — Peter Lynch
What to do
Keeping your cool can be hard to do when the market goes on one of its periodic roller-coaster rides. That’s why we have strategies in place that prepare you both financially and psychologically to handle market volatility. Here are some ways that we help you hold steady.
Have a game plan
Having a plan, with recognition that there is no escape from facing turbulent markets at different times in the cycle, helps prevent emotion from dictating our decisions. For example, we often take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. Diversification is the best way to try to offset the risks of certain holdings with those of others. This may not ensure a positive return in every period or guarantee against a loss, but it can help understand and balance the risks in advance. Diversification means that just because the S&P 500 might have dropped 10% or 20% doesn’t necessarily mean your overall portfolio is down by the same amount.
Cash helps manage mind-set
Cash on hand can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. In our planning, we look at how much cash you should have on hand, once you’ve established an appropriate asset allocation, hand to prevent having to sell stocks in a down market to meet ordinary expenses. Having a cash cushion coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you’re positioned to take advantage of a downturn by picking up bargains may be a boost to patience!
Look at history
When you’re investing for the long term, it helps to take a look back and see how far you’ve come. If a portfolio is down, it can be easy to forget any progress you may already have made over the years. Though past performance is no guarantee of future returns, of course, the stock market’s long-term direction has historically been up. With stocks, it’s important to remember that having an investing strategy is only half the battle — the other half is being able to stick to it. That’s why the plan and the time frame for when you need your money is so essential. It’s normal to feel like jumping out to avoid losses, but you are actually locking in those losses. And will you know when to get back in? Patience is key to building wealth (as well as a strong stomach).
Remember that everything is relative
Most of the variance in the returns of different portfolios can generally be attributed to their asset allocations. If you’ve got a well-diversified portfolio that includes multiple asset classes, your overall strategy will capture the ups and the downs of those asset classes, protecting you from the risk of putting all your eggs in one basket. Whatever asset class is up and hot at one time will have its day on the bottom, often regardless of the fundamentals of the companies. This is because markets react with emotion and focus on short-term drivers. Keeping an eye on the longer term gives us an edge.
The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. A volatile market can be an inopportune time to turn your portfolio inside out. A well-thought-out asset allocation based on your specific goals remains the basis of good investment planning.
Stay on course by continuing to save
Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings.
By regular investing, the dollar-cost-averaging — investing a specific amount regularly regardless of fluctuating price levels —may be giving you a bargain because you can buy when prices are down. However, dollar-cost-averaging can’t guarantee a profit or protect against a loss. Also consider your ability to continue purchases through market slumps; systematic investing doesn’t work if you stop when prices are down. Finally, remember that the return and principal value of your investments will fluctuate with changes in market conditions, and that’s part of the risk/reward of investing in securities.
Remember your road map
Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Timing the market can be challenging under the best of circumstances; wildly volatile markets can magnify the impact of making a wrong decision just as the market is about to move in an unexpected direction, either up or down.