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Tips to Ride Out a Rough Market

BY Jane Young, CFP, EA

It is reasonable to have anxiety about your investments with high inflation, rising interest rates, and the instability in the banking sector. This has been an unusual year, and some feel we are in unprecedented bad times. This is a feeling that investors commonly experience during periods of economic disruption. It is easy to feel things are different this time, but history shows we have recovered from many periods of economic and market challenges much greater than we are currently experiencing.

Investors often give up on their plan when they feel the old rules no longer apply.  Do not fall into this trap, there have always been market cycles and negative headlines.  The key to investment success is to stay invested, maintain a long-term focus, and stick to your plan.  

In the Dalbar, Inc.  2022 Annual Quantitative Analysis of Investor Behavior report, they found that investors who remained patient and did not focus on short term market fluctuations were significantly more successful than those who let emotions override their long-term strategy.  Your plan is only as good as your ability to stick to it.  

The study found that over the last 30 years, the average equity fund investor earned 7.13% vs 10.65% for the S&P 500 resulting in an annual return of 3.5% less than the S&P 500.  Investors are often their own worst enemy reacting to short-term market fluctuations by timing the market. No one can predict the market and if you pull out you may miss a significant rebound.

The emotional reaction you experience when the stock market falls is real.  The pain you feel from a loss is much greater than the joy you get from an equivalent gain.  When markets drop, investors are tempted to sacrifice long-term gain to avoid short-term loss. You need a process and plan to help guard against making emotional decisions.

Maintain an investment strategy that supports your timeframe, financial goals, and risk tolerance.   Your asset allocation needs to be aggressive enough to meet your goals but safe enough to avoid anxiety during market fluctuations.  You need a diversified allocation that you can stick with during rough market conditions.   

Rebalance your portfolio on an annual basis to stay on track to your plan.  Avoid constantly monitoring portfolio performance, this leads to unnecessary anxiety and the temptation to time the market.  Tune out the daily financial news.  The news media’s interest in financial issues increases when things go south, because bad news attracts viewers.  Too much negative news can weaken your resolve to stick to your  plan.  

Prepare yourself ahead of time for periodic market declines.  Keep money needed in the short-term in safe fixed income investments and limit stock market investments to long-term needs.  Periods of market decline are normal and generally short lived.  A solid plan and reasonable expectations will enable you to stay the course and achieve your financial goals.