Monday was a wild day in the stock market, and both rate hikes and inflation are hot topics in the news.
“Should I be worried?” is a question on the mind of many investors this week.
While market volatility and media headlines may tempt investors to make irrational and costly moves in their portfolio, I’d like to suggest that now could be a great time to ask three that could help you worry less and avoid making an abrupt investment change:
- Do I have adequate emergency reserves?
If you don’t have 3-6 months of reserves, consider developing a plan to get there. Click here if you’re interested in learning more about being prepared for financial emergencies
- What is the probability that your financial plan would succeed if a 20% drop in the market occurred? While past performance can’t guarantee the future, many of our clients find it reassuring when they stress test their plan to see how an immediate 20% or 30% drop in the market impacts their plan’s probability of success, especially when the likelihood of success remains high.
If you’re a current client and want to stress test your plan, click here for directions on how to do that.
- What does history have to suggest about market corrections and fears that might result from the next apocalypse du jour the media is reporting?
The media is currently talking a lot about inflation and how it could cause a market crash. However, the media often doesn’t focus on the bright side of a story. For example, you might not find articles that talk about:
- Several periods when market performance has been positive during higher periods of inflation
- Investors who own value stocks tend to outperform investors who own growth stocks during periods of inflation
- How costly it can be to miss just 1-5 of the best market days during the year
While the media may want you to feel like “this time it’s different,” it is essential to remember that volatility and market corrections are a normal part of investing.
Reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself. Click here to read more about how costly market timing can be.
Here are a few other ideas that have helped investors calm nerves that headlines have rattled:
- Instead of just looking at your account balance, look at how many shares you own. The number of shares you own has not dropped unless you sell your shares.
- Instead of looking at only your account balance, look at how many shares you are purchasing (if you’re saving systematically). Do you ever purchase holiday lights after Christmas or candy after Halloween? Investing can be similar during a market drop. If you buy shares in a recession, you’re acquiring more shares than you would have been able to purchase before the recession started!
- Here’s a fun one. Imagine how many years you have left to live — is it 20, 30, or 40 years? Go back the same number of years and see where the S&P 500 was trading then. One thing that you will likely notice is that there were many market drops the S&P 500 had before it arrived at its value today (which doesn’t count dividends that would have been invested!).
CLICK HERE to check out historical prices of the S&P 500
- Review your financial plan and investment strategy to see how much of your short-term money (e.g., money you need in 1-2-3 years) is invested in stocks
- Take a long-term view for your long-term money. Investing in equities may reward long-term and patient investors. Click here to read more about how adopting a long-term perspective can help change how investors view market volatility and help you look beyond the headlines.
- Be wary of market timing strategies. Even professional investors have difficulty beating the market! Over the last 20 years, 77% of equity funds and 92% of fixed income funds failed to survive and outperform their benchmarks after costs (source). If you are trying to time the market, you have to guess right twice – when to get out and when to get back in.
If you’re still worried, don’t hesitate to pick up the phone to call your advisor or to schedule an initial consult with One Life if you would like to create a plan that can help you secure your future even during difficult times. Our 90-minute consultation is always at no cost to you!