Going the distance: How can I build endurance for difficult markets?
The Dow posts a record high…the markets tumble in heavy trading. It can be difficult to maintain a long-term perspective during challenging economic times. How can you avoid the distraction of short-term market moves, build endurance and take some of the emotion out of investing?
1. TAKE ADVANTAGE OF MARKET OPPORTUNITIES.
In volatile markets, investors frequently question whether or not they should continue to invest. But, for long-term investors, falling stock prices shouldn’t be a large cause for concern. In fact, during market lows, you have the opportunity to add quality investments to your portfolio at attractive prices.
Corrections should be recognized as part of the normal market cycle. The market has experienced 20 percent or greater market corrections seven times since 1950. Despite this, had an investor invested $100 in the S&P 500 index in July 1951 and reinvested dividends, the initial investment would have grown to nearly $47,000 60 years later!
2. DON’T TRY TO TIME THE MARKET.
Investors have a tendency to make investment decisions based on emotion, leading them to try to time the markets. However, successful market-timing requires consistent knowledge of when the high and low points have been reached. This is a talent beyond the capabilities of even the most seasoned professionals. The odds of successfully timing the market become even slimmer when you consider that, historically, the biggest market gains are often clustered into very short time periods.
So, even if you’re able to avoid significant downturns, missing just a portion of a recovery can have a substantial impact on your portfolio’s long-term performance.
3. BUILD A WELL-DIVERSIFIED PORTFOLIO.
Remember that the market is made up of many components: small-cap and large-cap stocks; growth and value stocks; domestic and international stocks; and bonds of different countries, maturities and qualities. Each of these asset classes has different risk and return characteristics. As such, the most widely accepted way to help reduce the risk of investing is diversification, utilizing a wide variety of asset classes and investments so that your portfolio is not tied to the fluctuations and performance of a single investment.
4. BE A CONSISTENT INVESTOR.
While you can’t control how markets perform, you can control how much you invest, and when. The investor who moves steadily towards his or her goal will be more likely to succeed than the investor who darts in and out of the market.
The odds of successfully timing the market become even slimmer when you consider that, historically, the biggest market gains are often clustered in very short time periods.
Although past performance doesn’t guarantee future results, historically, investing on a regularly scheduled basis can reduce the impact of market fluctuations on your overall portfolio and take advantage of market downturns.
Dollar-cost averaging is an investment strategy in which a fixed dollar amount is invested at regular intervals—no matter which direction the market is headed in. As a result, more shares are bought when markets are down and fewer shares are bought when the market is up.
5. LET REBALANCING WORK FOR YOU.
During difficult markets, some investments will perform better than others. As this occurs, the asset allocation and risk profile of your portfolio will shift away from your target. It is important to systematically rebalance your portfolio to account for these changes. Rebalancing your holdings brings your portfolio back to target and back in line with your risk tolerance. While it may seem difficult to sell when a fund has performed well, or conversely, to purchase a fund that has underperformed, such moves are important to maintain your target allocation.
Revolution Wealth Advisors is a marketing name for John Robert Mara and Shaun M. Feldeisen in their capacity as representatives of Northwestern Mutual and is not a legal business name. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities and life insurance with long-term care benefits) and its subsidiaries. John Robert Mara and Shaun M. Feldeisen are Representatives of Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI (fiduciary and fee-based financial planning services), a subsidiary of NM and federal savings bank. All NMWMC products and services are offered only by properly credentialed Representatives who operate from agency offices of NMWMC. Representatives are Insurance Agents of NM, and Northwestern Long Term Care Insurance Company, Milwaukee, WI (long-term care insurance), a subsidiary of NM, and a Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, broker-dealer, registered investment adviser and member FINRA and SIPC.
This article was originally published in the August/September 2016 issue of Worth.