By: Nicole Gopoian, JD, CFP®
Many investors believe that by analyzing the right information, using the best tools and listening to the brightest experts, we can know which investments will be "winners" and which will be "losers." Experience is a powerful teacher. Those of us who have experienced volatile markets know that outsmarting the market over the long term is virtually impossible. The events that move the markets are those that have not yet happened. And no one knows the events of the future -- no one.
When the markets are falling, our brain senses fear and we feel the compulsion to do something. We seek an expert who will tell us the right thing to do. The problem is that no one has a crystal ball.
The fact of the matter is that our ability to make short term predictions is flawed. So what are we to do during a volatile stock market?
Stay the Course
Making decisions based on emotions is like kryptonite to an investor. The media consumes our daily lives and sometimes it seems impossible to escape the gloom and doom messages. This constant negative messaging creates a sense of fear, and that fear can drive us to sell stocks when their value is low -- often at the worst possible time. This destroys our portfolio value over the long term.
Remember, the stock market has averaged an annual return of over 10% since good record keeping began in the 1920s. But this return was not to be achieved without discomfort. It's been a reward to those of us who have been willing to wait out the bad times -- sometimes months or even years.
Develop and Update a Financial Plan
It's easier to stay the course -- particularly to tolerate the bad times -- when we have a plan in place. The plan identifies our goals and clarifies the best path to achieve them. It also provides insights on how to align our investment strategy with our goals and the level of risk that we're comfortable taking.
If the stock market volatility is giving you angst, now would be a great time to develop or update your plan. We will see exactly where you're at on the path to achieving your goals. If need be, it will allow us to make the necessary adjustments to get you back on track. This peace of mind will keep us from making emotional decisions when it comes to our investments.
At times, it may make sense for us to lean more one way or another towards asset classes when it comes to investing in the stock market, but it's important to always hold a mix of asset classes that do not respond the same way to similar kinds of risks. We don't know which asset class will perform best from year to year. But we do know that having a mix of asset classes will decrease volatility and create a smoother ride over time. We're also likely to experience a higher compound return, providing better financial outcomes and a higher likelihood of achieving our goals.
There are a variety of factors that can cause major market corrections (i.e., tech bubble, mortgage crisis, recession, etc.), but the tools to survive stock market volatility are the same: Stay the Course, Develop a Financial Plan and Diversify.