Knowledge enhances ability to cope with market volatility
Saratoga may be the “August Place To Be” but as of the recent past the stock market is not. With this in mind and given the recent level of volatility, we thought it appropriate to add some numbers to the previous sentence. Through the close of stocks this past Wednesday and since July 31, 2009 the Dow Jones Industrial Average has an annualized return of 11.58%, the S&P 500 12.14% while the NASDAQ Composite has returned 15.69%. However, stocks during the month of August over that same timeframe have fallen a total of 12.46%, 10.82% and 9.29%, respectively.
As long-term investors we must recognize that market corrections are a normal, regularly occurring event. According to data researched by The American Funds, from 1900 up through and including December 2016, on average the stock market as represented by the Dow Jones Industrial Average corrected five or more percent about three times a year; ten or more percent about once a year; fifteen or more percent about once every two years and twenty or more percent about once every 3½ years. Now consider this fact, the Dow Jones Industrial Average has not corrected five percent or more this entire year.
As investors we must also remember that fear is a greater motivator than greed. According to Robert Evans Wilson, Jr., the syndicated author of the column The Un- Comfort Zone, one that explores the aspect of motivation, “there are many things that motivate us. But the most powerful motivator of all is FEAR.” In Psychology Today, Mr. Wilson notes that “fear can be too powerful to use as a motivator because it can also paralyze – the classic deer in the headlights syndrome.” Furthermore, he notes that “fear is a powerful motivator, but it is a negative one. I prefer to motivate someone by eliminating doubt. Doubt destroys motivation.”
Fear during market corrections challenge one’s faith in the value of investing. It encourages doubt. Like religion, you should either have faith or not. Changes in the value of your portfolio should not alter that faith. You either believe in the fairness and longer-term opportunities of investing or you do not. If you think the playing field is stacked against you, get out now.
Recognize that investing is not a static environment. You shouldn’t review your portfolio merely on a quarterly basis. The stock market does not experience volatility merely because it is the end of a quarter. Review your portfolio as the values change or as you experience changes in your life.
Prior to investing develop a strategy to deal with the potential for negative results. By nature people are optimistic. We like to think good things will happen to all of our investments. However, as you know, that is not always the case. So have a plan for dealing with negative outcomes. Panic is not a strategy. Assess your situation and develop a sell discipline.
Keep in mind that it is sometimes prudent to hold some cash. If you are a bit skittish, a bit conservative or need a level of comfort, keep ten to twenty-five percent of your investment portfolio (this excludes your vacation, rainy day, short-term money) in cash. You’ll sleep better at night and who knows, you might be able to put this cash to work at lower market levels
HE BOTTOM LINE: Establish a well- designed financial and investment plan. Then, monitor, evaluate and, as necessary, make changes to that plan along the way. This seems logical and simple. However, when fear of monetary loss and emotions get in the way, watch out. That is a certain recipe for buying high and selling low! Avoid this by sticking to your plan and being dis- ciplined.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial adviser. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial adviser prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.