Instead of focusing on the volatility of the stock market, now is a good time to look inward and understand your own reaction to the headlines. And the stock market has made headlines in recent weeks.
Instead of the dreaded October bear market, there was a rally. But the real headlines are usually made every day, with the Dow Jones Industrial Average falling more than 500 points, then returning to close in good territory. Or vice versa.
As an investor, how do you feel when you hear the stock market report on the car radio or the evening news?
Be honest in your actions. Is the falling stock market giving you a sinking feeling in the pit of your stomach, causing you to worry about your retirement? Or are you just smiling, and wondering about the traffic or weather report? Do you immediately check the price of each stock in your property? Are you thinking twice about buying that new car?
All of these comments give you insight into your own investing personality. And instead of being controlled by emotion or paralyzed by fear, you need a serious plan. And you may even need a trusted financial expert to help you not only make that plan, but help you stick to it.
This advice is not for the faint of heart. Or for members of Cramer’s investment club on CNBC. By defining them, they define each market and stock. For some it becomes an obsession, and for others a mental challenge. But if you read this column in your local newspaper, I think you have a long-term perspective. Until then!
So, to keep you investing consistently, here are a few things you should keep in mind:
Don’t confuse volatility with risk. Daily or daily market changes can make eating as scary as riding a roller-coaster. You’ve probably heard of the VIX – an index that measures that volatility. Many use it as a warning sign, or an opportunity, to understand market volatility. Trading really likes volatility, the ability to make a bet at a certain time and expect to make a profit.
But if you are not a day trader, you can ignore the volatility, and worry about what will happen to your money in the long run. The road to retirement can be full of twists and turns, but if you make it to — and through — retirement age with enough cash to last you through your lifetime, you don’t have to worry about beating the market in the short term.
Put the Odds on your side
Morningstar’s market historians have analyzed the performance of large company stocks (including dividend returns) over the past 100 years. Today, that’s about as much S&P 500 stock as you might have in your company’s retirement plan.
If you hold that portfolio for just one year, you have about a 50/50 chance of making – or losing – money. After analyzing the performance of all 5-year periods over the past 100 years, they report that your odds of making money vs. lost money.
But if you held that portfolio for 20 years – large company stocks with dividend returns – there was NO 20 years where you would have lost money, even adjusted for historical 3% inflation. .
In other words, luck is on your side if you can hold that portfolio for 20 years!
But what if you are retired and wondering if you have 20 years left? Then, in a calm moment, adjust your view on the stock market. And keep more money in short-term investments (money for chickens), which gives an attractive yield of around 4.5% in the end.
Boredom and paralysis are an investor’s worst enemy
Highly successful investors plan long-term and adjust accordingly—based on their life stage, economic needs and changing economic outlook. The worst decisions are made from emotion. Greed can deceive you. But fear breeds panic and rash actions. Or it can cause paralysis. Or the lost place.
Before the end of the year is a good time to calmly review your situation with your advisor. And it’s a good time to rethink your mentor, and how to motivate and compensate them. And that is The Savage Truth.