5 Things to Remember When Markets Turn South
We would be arrogant fools not to admit that we’ve been incredibly lucky with the stock market over the past decade. Every year since 2013, the S&P 500 has hit new all-time highs—including one from earlier this year. And even though the Nasdaq has been suffering as of late, it has compounded 21% per year for the last five years.
This incredible performance can make it hard to remember what a true downturn feels like. But with inflation still rising, Fed tapering on the tip of our tongues, and the geopolitical conflict roaring in Ukraine, the markets are taking quite the hit.
Investors can’t help but wonder, what’s next?
To be honest, at the time of this writing, we are only twenty days into the Ukraine crisis and the Fed meets this week to discuss rate hikes. With no real hopes of a diplomatic resolution on the horizon and fear of stagflation, it’s probably safe to say we haven’t even really begun to feel the reverberations of these events in the markets yet. The rising costs of food and oil alone are enough to affect consumers and earnings.
But that doesn’t mean there aren’t steps you can take to ensure your own financial success. As markets test our patience going forward, remember these things:
1. Investors Can Be Their Own Worst Enemy
Short-term volatility, whether it lasts a day or lasts five years, will not affect your success in the financial markets…UNLESS, that is, you jump ship.
Dumping your equities in a downturn is the surest way to lose money. Not only do you incur unnecessary tax on liquidation, but you stop the compounding process dead in its tracks. And that’s not even the worst part.
Equity investors who try and “time the market” by jumping in and out every time the tide turns consistently underperform the index.
According to Dalbar's 2021 investor behavior study, the average equity fund investor underperformed the stock market (as represented by the S&P 500) by nearly 1.5% over 20 years through 2020. The annualized S&P 500 return during that time was 7.43%, while the average equity fund investor earned 5.96%.
This is a significant gap that could cost you all those well laid plans you mapped out with your financial advisor.
2. Only the Strong Will Survive
No one knows where stocks will go from here, but here is the good news: we don’t need to know. The road to long-term wealth isn’t a smooth one. In fact, volatility is more common than most investors realize. It’s the fluctuation in market prices—aka volatility—that allows investors the opportunities to make money after all.
Even so, it’s totally understandable to feel like upchucking when you see your portfolio value dip. The key is to stay strong and ride it out.
Of course, as your advisors, we are working behind the scenes to move your allocations to the right places. But that’s our job. Yours is to let us do ours—protecting your wealth and keeping you on track for those big picture milestones you’ve been working so hard to achieve.
3. You Don’t Lose Until You Sell
If you’re invested to grow your wealth (and who isn’t?), then you should not be panic selling in a downturn. Remember, you don’t actually lose anything until you sell. Until then, the portfolio will show a loss in value yes, but that value isn’t locked in until you pull the plug and start draining your investments out. If you can stay invested through the valleys, you’ll reap the rewards of the following peaks.
4. Stocks Always Go Up, Just Not Straight Up
The thing to remember is this: we don’t need to know when things will get better, just that they will. Over the course of history, the stock market has consistently gone up. It just doesn’t go straight up. There will be temporary setbacks, but they are only temporary if you don’t react emotionally to them.
5. Lean on the Guidance of Your Advisor
If you’re worried about the financial markets, please reach out. We understand that current events can be a bit overwhelming, and you may feel the need to be proactive. But remember, we created your financial strategy based on your goals, time horizon, and risk tolerance, and we anticipated there would be unsettling events along the way. If you can control your urge to throw in the towel when times get tough, you can make money over time.