There's a big risk to your portfolio right now—but it's not the stock market's volatility. It's your behavior.
During periods of market turbulence like the present one, investors are at special risk of making emotion-based decisions. Spooked by a big drop in the stock-market indexes, they sell to protect their remaining capital. Later, seeing a big rebound unfolding, they jump back in to avoid missing the gravy train.
Such "market timing" behavior, driven alternately by fear and greed, usually translates into big losses as we inadvertently sell low and buy high.
So what do you do during turbulent markets? If you're a long-term investor with a portfolio that's diversified based on your goals, time horizon and risk tolerance, the answer is simple: Sit tight. If your portfolio is properly designed, it will balance risk and growth over time to navigate you to your financial objectives. Indeed, taking action is often the exact wrong thing to do.
If the market's ups and downs are costing you sleep, we consider that you do the following.
- Take a long-term perspective. We are currently in the sixth year of a bull market that has sent stocks soaring. Corrections—declines of 10% from a recent high—are a regular feature of bull markets. They actually serve a healthy purpose by "re-setting" over-inflated stock prices to a healthier level.
- Tune out the noise. Dramatic headlines, dire warnings and urgent "calls to action" are rampant in our 24-hour news cycle. And in our wired world, the hysterics can be hard to ignore. But it serves no purpose to seek out pundits and commentators, whose goals, after all, are likely to be very different from yours. The news media's goal is to attract eyeballs and advertisers, which means promoting hyped-up story lines and giving short-term-thinking commentators a megaphone.
- Stop checking your account. As a long-term investor, you should be checking your account balance once a quarter at most. Why? Because, as studies have shown, the more frequently you check your investments, the more likely you are to fiddle with them. And that fiddling, as we've discussed, can undo even the best-laid plans.
- Trust capitalism. Free-market capitalism has withstood everything from the Great Depression to the two recessions of the past 15 years. And the current correction certainly isn't going to derail it. That's important, because the growth of in our free-market economy has always driven the growth of our stock market. In just the 25 years from 1990 to 2015, for example, the S&P 500 index has risen 475%. Free enterprise fuels the stock market, and the stock market rewards investors—as long as they're patient.
A final note: The right financial advisor can provide an invaluable service in helping you keep the market's fluctuations in perspective. Just be sure you are working with a fiduciary advisor—one who is legally obligated to put your interests first—rather than a broker, whose financial incentives may encourage him or her to peddle short-term advice.
In turbulent times, managing behavior is more valuable than managing money. Please don't hesitate to reach out if you would like to discuss your investments.
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