Whenever stock markets go through dramatic ups or downs, it’s natural for investors to feel a bit anxious.
But making drastic changes to your investment portfolio in the midst of market turmoil is usually not a wise move.
Let’s put some recent periods of market volatility in context:
- In the 10 years leading up to the end of 2014, the S&P 500 was up 109.5 percent on a cumulative basis, or about 7.7 percent per year. And that included a period when the S&P 500 dropped by half during late 2008 and early 2009.
- Mutual fund returns outperform the returns of the typical mutual fund investor by as much as 2.5 percent per year, on average, according to experienced investment analysis companies.
Why does the second point happen? It’s mainly because of investors chasing returns – jumping out of investments when markets go down and jumping back in when markets go up. The best ways to counter that sort of destructive decision-making are a long-term perspective and a steady hand.
None of us can know what’s coming next or change the future. But what we can control are things like diversification, having realistic expectations and living below our means.
When it comes to our financial plans, investments often get the most attention, but it’s important to remember that investments are just one component of a comprehensive financial strategy.
Other components such as cash-flow management, tax planning, insurance and estate planning can be just as important, are more readily in our control and can provide an important balance to the investment side of our financial plans.