Your decisions about investing can be difficult. After all, the results of your decisions have a huge impact on your financial future. Investing is even more challenging during volatile markets. You have money at risk- and watching volatility just increases that anxiety. Consider these tips to keep market swings in perspective.
#1- Ben Franklin’s advice: More information can help
Moneycrashers provides some great quotes from Ben Franklin regarding money and finance. I blogged about this earlier this summer. Here’s a quote that I think is insightful:
“An investment in knowledge always pays the best interest.”
Click here for Live Webinar: How To Manage Investment Costs and Risks: Mutual Funds and ETFs
Learn the “why” behind market volatility. That’s the purpose of this blog post. I don’t know about you, but getting more information about any issue always reduces my anxiety. Franklin was a lifetime learner- we all should be.
#2- Do you know yourself?
How much risk are you comfortable taking- I mean really comfortable with?
Wealthfront is an investing company that caters to millennials. This group is defined as people born between in early 80s and early 2000s. They tend to want low cost, passive investing with less help from more expensive financial advisors. All good.
To find out about an investor’s suitability, a new account owner is asked a series of questions about investment goals, experience and risk tolerance. Let’s assume you’re answering the risk tolerance question. Think about your answer this way:
If your portfolio’s value went up or down 20% in one year, is that something you could live with? If not, how about 10% up or down? You start to get the idea.
In late August of 2015, we’ve had market swings in the S&P 500 of 2-3% per day. How much anxiety is that causing for you? If your answer is “a whole lot”, you need to shift some of your assets out of equities- or at least out of more volatile equities.
#3- Volatility is a matter of degree
A 2-3% daily swing in the S&P 500 does get your attention, but let’s keep it in perspective. I was an investment rep in 1987- only a few years out of college. My car was in the shop on Oct. 19th , so I caught a ride home with my co-worker, Scott.
Bloomberg explains that the market lost a third of its value in the 5 trading sessions from Oct 13th to 19th. On Black Monday the 19th, the market declined 22.6%- in one day.
NPR points out that, within the past week, we had a period when the market fell nearly 10% (Their story is dated Aug 25th– the markets have come back since then). 10% in a week isn’t 22.6% in a day….
Certainly, volatility differs, depending on the types of investments you purchase. WiseBread provides a list of investments that have recently had high volatility.
#4- Experience of past declines
Ric Edelman, chairman and CEO of Edelman Financial Services, is quoted in the NPR story. He points out that, in the last 15 years, we’ve seen two abrupt market declines: The tech bubble of the early 2000s, and the ’08-’09 mortgage crisis…”only to see the market nearly triple from its lowest point.”
Financial Planning makes another great point:
Since 1900, there have been 35 declines of 10% or more in the S&P 500… “Of those 35 ‘corrections,’ the index fully recovered its value after an average of about 10 months.”
Use your experience in past declines to take a long view about the market’s performance.
#5- Technology is speeding up trading- and probably volatility
The Washington Post writes that advances in technology allow larger stock trades to be placed and filled quickly. As technology improves, so does the speed of trading. This is particularly true at hedge funds and other firms that trade large positions with cutting edge technology.
We all may have to accept more volatility as tech improves.
#6- Remember historic rates of return- over the long term
What is a sustainable rate of return on a stock portfolio? Well, let’s use the Standard and Poor’s (S&P) 500 index as an example. This is an index of the 500 largest stocks, in terms of capitalization. The average annual rate of return from 1928 to 2014 is about 10%. If you’re investing over the long-term, 10% is probably a sustainable (expected) rate of return.
There’s an old quote: “timing the market is not as important as time in the market”. Consider you investing timeline (10 years, 15, 20). Once you decide on a timeline and invest, consider a reasonable return over the timeframe.
Sure, there will be volatility along the way, but leaving your funds invested until the end of your timeframe has proven to be successful over the long term. The Simple Dollar provide some examples.
Use all of these tips to keep volatility in perspective. You can grow your portfolio, handle market swings- and reach your financial goals.
Do you use these financial strategies? I’d love to hear from you.
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(website and blog) http://www.accountingaccidentally.com/
(you tube channel) kenboydstl
Wall Street Two Signs
Terrapin Flyer, Wall Street (CC BY-SA 2.0)