Today we’re diving into a topic that’s been on many minds lately—market volatility, especially when it trends downward. This is often when I receive the most anxious phone calls from clients concerned about their financial future.
First and foremost, let me remind you that daily, monthly, or even yearly market fluctuations should not derail your long-term financial goals. When we run financial projections, we anticipate market downturns. In fact, depending on your investment allocation, we might expect your account to dip by 10%, 15%, or even more each year. While this can be unsettling, it’s important to remember that such downturns are a natural part of investing. The market’s ups and downs are expected, and history shows us that patience is key.
Consider two significant market events that underscore the importance of staying invested:
1. **The COVID Crash of 2020**: The onset of the pandemic brought a swift and severe market decline. The uncertainty was overwhelming, and many felt compelled to sell their investments to avoid further losses. However, those who held on or even bought during the downturn were well-positioned to benefit from the subsequent market recovery. As soon as vaccines were on the horizon, markets rebounded quickly, and those who stayed invested saw significant gains.
2. **The Great Financial Crisis of 2008-2009**: This period was marked by extreme volatility and fear, with many investors pulling out at the worst possible time. The market bottomed out in March 2009, and from that point, it began one of the most remarkable bull markets in history. Those who had exited missed out on substantial gains as the market recovered.
A personal anecdote from the Great Financial Crisis reinforces this lesson. In late 2008, I had a client who was extremely concerned about his investments. Despite his frustration, I advised him to stay the course. He agreed, and as luck would have it, he ended up investing a significant amount of money at the market’s bottom. By October or November of that year, he had not only recovered his losses but was back to breakeven. This experience highlights why it’s crucial to remain patient and allow the market to do its job over time.
To illustrate the pitfalls of trying to time the market, I often refer to a humorous yet poignant graphic by Carl Richards, former artist for the New York Times “You’ve always heard you’re supposed to buy low, sell high” Carl’s take is to buy high with greed, sell low due to fear and repeat until broke! This perfectly captures the danger of reacting emotionally to market fluctuations rather than sticking to a long-term strategy.
It’s important to remember that investing isn’t just about growing your wealth—it’s about funding your goals, such as education, vacations, or even early retirement. The market is a tool to help you achieve these milestones, and staying invested is crucial for long-term success.
When market stress becomes overwhelming, take a step back. Studies show that spending time with loved ones, getting outdoors, and taking a break from financial news can significantly improve your well-being and decision-making ability. It’s essential to distance yourself from the noise and focus on what really matters.
However, a crucial note: any money you’ll need within the next 6 to 18 months should be kept in cash, a money market fund, or a bank account. The stock market is not suited for short-term needs due to its inherent volatility. Your time horizon should match your need for funds to avoid unnecessary risks.
Remember, while market downturns are challenging, maintaining a long-term perspective, and staying invested is often the best path to achieving your financial goals. Until next time, stay patient and keep your financial health a priority!
