Yes, this is what stock market volatility looks like…
While nobody (including me) likes to see their investment accounts decrease in value, it serves as a good reminder that if you want to participate in the long-term growth historically achieved by investing in stocks, you have to participate in the risk. There are no free lunches. And, as evidenced by the chart below, trying to time when to buy and when to sell in the hopes of reducing the risk and/or maximizing the return is a pretty fruitless exercise.
Wondering if there is any action you should take (or not take) as a result of the volatility? See the 7 tips below.
#1 Do nothing
If you have a diversified investment plan that is based on your goals and takes into account your willingness to withstand the market ups and downs, you should be well-positioned to ride out the inevitable bumps. (Bonus Tip – If the last week and a half has caused you to lose sleep, your portfolio is likely not reflective of your risk tolerance.)
Although the data in the Charles Schwab graphic below is slightly outdated, the message is still true today.
#2 Stay diversified
While having exposure to US and international stocks and bonds may sound like dated advice (and it was certainly questioned after the 2008 crisis), it remains a valid strategy. High quality bonds can provide stability when it feels like every equity investment you own is down.
#3 Tune out
This is both more important and harder to do than ever. If you know that you are apt to panic or make snap decisions based on the news, do what you can to avoid it. Unless you have a very specific reason to review your investment accounts, don’t. If everyone at a party is discussing, or tweeting about, how they “got out of the market” just in time or loaded up on bitcoin after the correction, consider expanding your social network.
#4 Understand the cost of your investments
High expenses are easy to ignore when it seems like everything is going up, up, up. However, the double whammy of negative investment returns and high expenses is particularly painful and can have long lasting implications for a portfolio.
#5 Re-evaluate your cash position
If you don’t have enough cash to cover your regular expenses for 4- 6 months (at a minimum), you may be at risk for having to sell investments at just the wrong time.
#6 Get better educated
Take this as an opportunity to learn something you don’t know about the economy, the stock market, or the investments you own. Fidelity, Schwab, Vanguard, and most other financial institutions have plenty of resources available on their websites. In addition, Morningstar has some great educational offerings, and I am big fan of NPR’s Planet Money podcasts.
#7 Be realistic
If you are invested in the stock market, there will undoubtedly be years when that portion of your portfolio will have NEGATIVE RETURNS. Curious to know how often those negative return years have occurred? To view 120 years of annual Dow Jones Industrial Average returns, click here to view a prior blog post on this topic