How to Prosper from Stock Market SwingsFinancial Planning Insights Investing Behavioral Finance Retirement Planning
Year-to-date, the S&P 500 is in correction territory, down almost 17% on the year. It looks like volatility is back in the market and this is a good time to reemphasize an important part of long-term investing – you need to keep calm and carry on. If you are a buyer of stocks – you are adding money every two weeks into your company retirement plan – this is a great opportunity for you to acquire more shares while they are on sale. For the same amount of money that you invested last year, you can buy more shares because they are on sale for 17% off! If you are a seller of stocks, this is the time when you live off your non-stock investments or rebalance your portfolio and sell some non-stock investments (bonds and cash) and buy more stocks on sale.
Declines of at least 10% in the stock market happen quite regularly and declines of 20% have happened 23 times since 1929 – an average of every 4 years.
So why on earth would we invest in something that goes down more than 20% in value on a regular basis? Because that something has appreciated over 7% per year over the last 93 years and has paid dividends (income) averaging another 4.8%. That’s a combined total return of about 11.8% per year. Now obviously, that’s an average return and in many years the market loses value. So, how do we ride out these regularly occurring market swings?
The best way to ride out these swings is to have two different investments: stocks and bonds. Think of them as being on the ends of a teeter-totter. When the stock end is down the bond end is up. When the stock end is up the bond end is down. My job is to help you keep the ends equal. When stocks are up, we move some of those funds to the bond side. When stocks are down, we move some funds from the bond side. This forces you to sell stocks when they are high and buy stocks when they are low which is what every investor is attempting to do. This process can become extremely difficult to do on your own during times of increased volatility in the markets. If you make an emotional decision and miss out on market recovery your financial dreams may suffer.
Keep this in mind, half of the S&P 500 index’s strongest days in the last 20 years occurred during a bear market (down 20%). Another 34% of the market’s best days took place in the first two months of a bull market – before it was even clear a bull market had begun. If you think you can time the market and get out of stocks to avoid the crash, chances are you’ll miss the most significant portion of the next market recovery by sitting on the sidelines. The best way to weather a downturn is to stay invested in a globally diversified portfolio that has been customized to your unique risk profile.
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