It doesn’t take much to make investors uneasy about the markets these days. Scanning the headlines is like taking a walk through a minefield of trigger words: Interest rates, tax laws, international politics, and of course the Affordable Care Act. How’s an investor to react?
In times of uncertainty and conflicting signals, it’s tempting to stop adding to your portfolio, constantly reallocating your assets, and move into non stock market investments. According to a study by Fidelity, that’s a bad idea. Their study of more than 11 million retirement accounts found that investors who pulled money out of the market at the end of 2008 or the beginning of 2009 and stood on the sidelines through March 2010 lost an average of nearly 7% in their retirement accounts.
On the flip side, what about the savers who didn’t stop investing and didn’t get out of the market? Their study showed that investors who continued to make contributions and maintained their allocation from September 2008 to March 2010 saw their balances increase roughly 22%. Wow, that’s a big difference! Staying the course and almost using a hibernation mentality is very difficult in our era of 25 hour news and everyone’s so called best advice and best investment strategy that changes every time the wind blows in a different direction. So I ask again.
How’s an investor to react??
I believe there are several things that investors can do to cultivate the “maintaining balance” mindset and resist the fight-or-flight impulses that can get them into trouble. First and foremost, investors need to recognize and fully grasp that dips in the market are part of normal market cycles. Second, these investments are for the long term. They are not day trading accounts, but rather decade trading accounts.
Short-term market volatility is just noise and if the noise is loud enough, it detracts investors from achieving their goals. Third, don’t second guess the future of your core and best performing investments. There is something to be said about an investment that, during a down cycle, loses less than its peers. That’s often a sign of strength. But by selling at the first sign of trouble, investors lock in their losses and risk missing out on the rebound. Fourth and most important, actually maintain balance. Not just emotionally, but within their investment portfolio.
Investors should remember to stick to their original plan which was established and put in place during a time when cooler heads prevailed. Re-visiting that plan will in turn allow investors to resist the urge to continually adjust their risk tolerance based on today’s headlines and hence please say it with me “MAINTAIN BALANCE”.