They’re called “long-term” goals to remind us to avoid short-sighted missteps.
Markets are swinging. We’re coming off a high in 2021 and into a time of rising interest rates meant to combat rising inflation … and the markets have responded. Some account balances have dropped, which means that some investors’ emotions have been rising, which sets the stage for irrational decision-making. Now, more than ever, it’s important to keep an eye on market fundamentals and evaluate conditions based on sound principles rather than making serious decisions based solely on emotion. How?
Here are three rules of thumb for reacting to market swings decisively, not illogically.
1. Keep the words “long-term” in mind.
Ups and downs are inevitable, but over the long term, markets have always been able to recover. If you haven’t studied the way markets typically move through investment cycles over decades, get advice from financial advisors who recognize which factors can lead to what kinds of outcomes.
If you’ve been invested since 2008, you’ve seen a market reshaped by a major decline and massive Federal Reserve interventions – and you’ve seen the major recoveries since then. If you’ve been in the market since 1998, you’ve seen that and the way the dot-com boom led to the dot-com bust, which led to the wild optimism leading to the 2008 market.
Remember: Over the last four decades, markets have hit double-digit declines in more than half of the years, yet 75% of those decline years ended with positive returns. The longer the period over which you look, the better the picture becomes overall.
Source: macrotrends - The chart represents 100 years of the Dow Jones Industrial Average (DJIA) as of October 21, 2022. The DJIA is an unmanaged index and not available for direct investment. Past performance is no guarantee of future results.
2. Make yourself aware of herd mentality.
Following the herd is a good way to avoid individual threats (like, for instance, a company that’s lost its footing) but a bad way to avoid heading over the edge of a ravine. World events can cause uneasiness that leads to rash behavior – and that’s not profitable.
Even when the Fed takes action to stabilize the markets, people can react by selling their investments only because they see the news and “smell trouble.” That quick-draw, gut-check behavior can be contagious. When making that kind of decision, it’s important to ask yourself whether you’re “herding” – that is, copying the behavior of other investors – or whether you have a more solid basis for your decision.
3. Take a moment to ask a professional.
Whether you’re planning to hold fast to time out a downturn or considering selling off to cut losses and diversify an underperforming portfolio, there’s someone out there who has the perspective that comes from full-time research and experience with all kinds of financial weather. No one can see the future with crystal clarity, but a good advisor can act as a sounding board, helping you to evaluate the factors behind your decisions and to reach the right choice for your unique situation. A calm review can prevent rash action and help keep your portfolio aligned with your long-term goals.
As markets become more volatile, our advisors maintain a disciplined process while monitoring every one of our clients’ accounts. If you ever have a question, we’re here to offer guidance.
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Past performance is no guarantee of future results. Diversification does not guarantee a profit or prevent against losses. All investing involves risk including the risk of loss of principal.
Sources:
Market Swings: https://www.usbank.com/investing/financial-perspectives/market-news/is-a-market-correction-coming.html
Principles: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/principles-for-investing/ (via https://www.legendwny.com/blog/hunker-down-with-social-distancing-and-your-investment-strategy )
Long term: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart