Keeping calm during market volatility
Stock market changes can be unsettling
The steep stock market changes we have experienced in recent days can be unsettling. Few people enjoy watching the value of their investments swing widely.
However, before making drastic changes to your investment portfolios, it’s helpful to put the recent experience in context. In the 10 years leading up to Dec. 31, 2014, the S&P 500 is up 109.5 percent cumulative, or about 7.7 percent per year. This includes a period during which the S&P 500 dropped by half during late 2008 and early 2009.
Over the past few weeks, the S&P 500 simply took away a few percentage points of that long-term return. Furthermore, most investors have only a fraction of their portfolios exposed to equities. So for many, this is merely a blip.
Experienced investment analysis companies have found that mutual fund returns far outperform the returns of the typical mutual fund investor. The gap is as much as 2 to 2.5 percent per year on average. The reason for the gap is investors chasing returns – jumping out of investments when markets go down and jumping back in when markets go up. The problem is that investors who make these decisions are usually behind the curve, getting out – and then getting back in – too late. A long-term perspective and a steady hand are the best ways to counter this destructive behavior.
We cannot change or know what will come. What is in our control are things like diversification, having realistic expectations and living below one’s means.
We know your concern about your investments is real, and it can be hard to sit back and watch the market swing up and down. But what is even harder over the long term is the stress created by dwelling on things out of our control. The wisdom and courage to work on the things that we can control can be very freeing. 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