An investor’s greatest enemy at times can be emotion. Many have fallen victim to the emotional cycle induced by the market and its severe fluctuations. The downturn of 2008 not only shook up portfolios, but confidence as well. Investors didn’t know where to turn and they didn’t know what to think. The hope brought on by 2009 had some thinking that it was the sign of a long-term recovery. It’s not possible to perfectly time the market on short-term dips and rises, but it is possible to know that history is on the side of the investor when it comes to market fluctuation. Since 1932, the average annualized return of the US stock market has been 10.76% (standardandpoors.com), indicating that a diversified portfolio of stocks and bonds is still one of the viable options to help accumulate long-term growth and beat inflation.
Instead of trying to foresee the future of the market, stop and assess your future goals. Take a look at your portfolio and make sure that you are ready for the rebound. Focus on how the decline and correction have affected your investments and take the necessary steps to adjust for similar occurrences. A good starting block is to better understand how emotion affects behavior in a turbulent market. Not only are you affected by your own emotions, but emotions of mass investors will impact your decisions as well.
From 1995-1999 investors became engulfed in the idea that the dot.com boom would continue to send the market in an upward trend indefinitely. Interest in speculative investment options soared. During this time of increased confidence and seemingly invincibility, investors lost sight of risks and inflated prices. When things took a turn in 2000, a considerable amount of wealth was lost. Still wary from that downward spike, investor emotion was thrown in the opposite direction in 2008. Confidence had been broken by steep declines and investors became nervous, ditching well-planned strategies for cash even though stock prices were at an all time low. Both cases show that emotion alone can fuel irrational investor behavior and lead to costly mistakes.
Timing the market is difficult and historically ineffective. Define your future goals, choose a strategy that will best achieve those goals and stick with it. For many investors, this is easier said than done. There are few things that you can keep in mind when trying to navigate through the emotional roller coaster of a fluctuating market.
Monitor you emotions and control impulsive behavior. Both of these can easily be taken under control if you arm yourself with the proper knowledge. If you find yourself becoming overwhelmed with the emotional highs and lows of immediate events, step back and look at the big picture. Have confidence in knowing that you have a secure strategy that will be able to handle inevitable ups and downs of market fluctuation and that your long-term investments will still be in place to reach your goals. Remain focused on your long-term financial future. Stay away from market timing and the emotional stress that goes along with it.
As an investor, it’s important to remember that volatility is inevitable and unavoidable. The most success comes from riding out the waves of the market, no matter how dire things may look. A diversified portfolio of stocks and bonds will increase your chance of outpacing inflation and gaining a higher annual return. If you are re-evaluating your portfolio and have any hesitations with your next move, it’s time to speak to a financial advisor to get on the right path to reaching your long-term goals.