Instead of focusing on the wild gyrations of the stock market, this is a perfect time to look inward and understand your personal reaction to the headlines. And the stock market certainly has been making headlines in recent weeks.
Instead of the feared October bear market, there was a dramatic rally. But the real headlines are frequently made on an inter-day basis, with the Dow Jones Industrial Average dropping more than 500 points, then rebounding to close in positive territory. Or vice versa.
As an investor, how does that make you feel when you hear the stock market report in the car radio or on the evening news?
Be honest about your reaction. Does a falling stock market give you a sinking feeling in the pit of your stomach, triggering worries about your retirement lifestyle? Or do you merely smile, and wonder about the next traffic or weather report? Do you immediately check individual stock prices of your holdings? Do you think twice about buying that new car?
All those reactions give you an insight into your own investment personality. And instead of being ruled by emotion or paralyzed by fear, you need a sensible plan. And you might even need a trusted financial professional to help you not only make that plan, but help you stick to it.
This advice is not for speculators. Or even for members of Cramer’s investment club on CNBC. By definition they are timing both the market and individual stocks. For some it becomes an obsession, and for others it is a mental challenge. But if you’re reading this column in your local newspaper, I’m thinking you have a longer term perspective. Until you don’t!
So to keep you on a steady investment course, here are a few things to keep in mind:
Don’t confuse volatility with risk. The daily or intraday swings of the market can make in eating feel as scary as riding a roller-coaster. In fact, you’ve probably heard of the VIX — an index that measures that volatility. Many use it as a warning signal, or opportunity, to understand market fluctuations. Trades actually love volatility, a chance to make sort-term bets and hopefully profits.
But if you’re not a day-trader, you can safely ignore volatility, and instead be concerned about what happens to your money over the long run. The road to your retirement date may have twists and turns, but as long as you get to — and through — your retirement years with enough money to last your lifetime, you don’t need to worry about beating the market in the short run.
Put the Odds on Your Side
Morningstar’s market historians have reviewed the performance of large company stocks (with dividends reinvested) over the last 100 years. In todays terms, that would be equivalent to an S&P 500 stock index fund that you likely have in your company retirement plan
If you hold that portfolio for only one year, you have a roughly 50/50 chance of making — or losing — money. After reviewing the performance of all 5-year periods in the past 100 years, they report you would have a roughly 2:1 chance of making money vs. losing money.
But if you held that portfolio for 20 years —large company stocks with dividends reinvested — there was NO 20-year period in which you would have lost money, even adjusted for the historical average 3% inflation.
In other words, the odds are significantly on your side if you can hold that portfolio for 20 years!
But what if you’re already retired and wondering whether you have 20 years? Then, in a calm moment, you adjust your exposure to the stock market. And keep a greater amount in short-term liquid (chicken money) investments, which are finally offering an attractive yield of around 4.5%
Panic and Paralysis are an Investor’s Worst Enemies
Truly successful investors make a long run plan and adjust appropriately—based on their stage in life, changing economic needs, and changing economic outlook. The worst decisions are made based on emotion. Greed can lead you astray. But fear breeds panic and rash actions. Or it can create paralysis. Either is a losing position.
Just before year-end is a perfect time to calmly consider your situation with your advisor. And it’s also a good time to reevaluate your advisor, and how he or she is both motivated and compensated. And that’s The Savage Truth.