How to stay focused on your investing goals
How paying attention to your emotions and taking a different look at investment returns may help bring some peace of mind in volatile times.
Market volatility may have left you feeling ready to cash out of all your investments. Or perhaps you already cashed out and are waiting on the sidelines for the right time to re-enter the market. Such uncertainty is understandable; investors across the board felt the pain of the Great Recession.
As you work with your financial adviser to determine what makes sense for your long-term goals, keep these two investing perspectives in mind:
1. Be careful of your emotions
As the clock to the right shows, stock market cycles — which include normal ups and downs as well as periods of more extreme volatility — often cause investors to do the wrong thing at the wrong time.
- During periods when equity returns have been relatively high, people have tended to flock to the market — when prices were at their highest.
- But when equity returns have lagged, many have sold their holdings and left the market — at a time when stock values have been most attractive.
In essence, these investors bought investments at a high price and sold them when their value was low — the opposite of the “buy low, sell high” philosophy.
2. Take a fresh look at returns
There are many ways of looking at investment results. Try to keep a long-term perspective, rather than focus on short-term fluctuations in your account.
To gain some perspective, take a look at the S&P 500 results by 10-year rolling returns shown in the table below.
In calculating “rolling returns,” analysts look at the total returns of the S&P 500 in each of the decades that have elapsed since 1926, the first being 1926–1935, the second 1927–1936 and so on until the latest decade, 2004–2013.
Of these 79 periods, just five decades have had negative returns: 1928–1937, 1929–1938, 1930–1939, 1999–2008 and 2000–2009. It’s important to keep in mind that past results are not predictive of future results.
|The S&P 500: 10-year rolling returns, 1926–2013|
|Number of rolling decades with positive returns||74|
|Number of rolling decades with negative returns||5|
Results are based on the unmanaged S&P 500 market index calculated with dividends reinvested for the period December 31, 1925, through December 31, 2013. Note that two of the five decades (1928–1937 and 1930–1939) had negative annualized results of just −0.00% and −0.08% respectively.
What you can do
- Remember that it’s natural to feel worried at times.
Even people who are aware of the market’s historical cycles may feel torn between their emotions and knowledge.
- Follow your head rather than your gut.
Maintaining a regular investing strategy means you have the opportunity to take advantage of market declines by purchasing more shares for less money. Keep in mind that regular investing does not ensure a profit or protect against loss. You should consider your willingness to keep investing when share prices are declining.
- Talk to your financial adviser.
Before making any decisions, make sure your emotions are in check and talk to your financial adviser. Take steps to ensure that your long-term investment strategy stays on track.