Distracted by Market Volatility
Trade wars, Brexit, NAFTA – all of these bring volatility and the fear of losing money to mind.
A client recently emailed me the following. “I’m becoming increasingly concerned about the volatility in the stock market. Would it benefit us to move to a money market fund in the short term in order to wait out the crazy market?”
Understand what your risks are
Depending on your portfolio, the fear of volatility may not equal the market risk based on the probability of capital loss. If you are saving for a short term goal, then investing in the stock market increases your risk. Whereas, investing for the long term, such as retirement, is less exposure to market volatility if you are properly diversified.
Many investors believe that pulling money out of stocks and into safe money market or cash is the safe move. Wrong. Derailing a long term plan by timing the market is one of the riskiest moves an investor can make.
Know the facts
A recent study done by J.P Morgan analyzed the S&P 500 index over a 20 year period, ending on December 31, 2018. If you had invested $10,000 at the beginning and stayed fully invested, the account would have grown to $29,845, or 5.62% annualized performance. Missing 10 of the best days over the same time period, the overall return is cut in half. If you missed 40 of the best days, the investment would have a return of -4.2%. With 5,000 trading days, less than 1% of the time is responsible for the change in returns.
What should you do?
Over those 20 years, there was the tech bubble (2000’s), the financial crisis (2008) and the worst December returns in 2018. The markets have experienced a correction on average once every two years, yet people are always in fear of ‘the next one.’ You increase your odds of investment success and decrease your risk by staying invested, re-balancing periodically and avoiding distractions. Do not get distracted by the latest trade price or make emotional decisions on a fear of what could be. Talk to me to review your investments and make sure they are in line with your financial goals.