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Investment markets offer few guarantees, but one thing investors can count on is volatility. Volatility is the ups and downs that the stock market can bring.
And although the stock market often provides a bumpy ride in the short term, zooming out shows its powerful wealth-building potential.
The trick for investors is to figure out how to thrive despite volatility, allowing them to stay invested for the long haul.
A recession is not a reason to sell
Unfortunately, many investors mistakenly let their emotions lead them to follow the herd. During market upswings, more investors pile in, chasing easy money and significant returns. Then, as stock prices plunge, investors retreat to the sidelines, selling on the way down and locking in losses.
This behavior creates the opposite effect of what investors are seeking. Wise investors prefer to buy when prices are low and sell when prices are high.
Markets and the economy are separate but very related. Markets look forward, while economic data used to track economies inherently looks backward (because of the lag time required to compile data). At times, markets can even do well throughout periods of economic recession due to this difference.
Historically, markets function as a leading indicator, meaning they tend to fall in advance of recessions and start rising before the economy does.
Sam Watkins, CFP® TrueNorth Wealth
TrueNorth Wealth is a zero commission, fee-only, financial planning firm. TrueNorth Wealth specializes in high-net-worth individuals. We offer academically sound financial planning, and we educate each client on what our investment philosophy is, and why. We take an active role in helping each client examine their tax bill each year and creating meaningful strategy to manage that tax liability. If you are looking for an exceptional advisor, call TrueNorth Wealth for a no-cost consultation, today! 801-274-1820U.S. stocks have averaged positive returns over one-, three-, and five-year periods over the last century following steep declines, according to information from Dimensional Fund Advisors. This means if your strategy is to sell when you become worried about a recession, you might already be too late and you could miss the upswing instead.
In a world of uncertainty, the key to success is having a long-term strategy you can stick with and that can be successful despite volatility.
Time the market at your own peril
A common saying among financial advisors is "a portfolio is like a bar of soap. The more you handle it, the less you have." Repeatable investment success is not about timing the market; it's about time in the market.
Data is clear that actively trying to out-predict markets usually leads to failure for professionals, let alone DIYers, explains an article by David Booth, chairman and founder of Dimensional Fund Advisors, a global investment firm with more than $600 billion under management.
Successful market timing requires getting two bets correct, not just one. You first must buy at the right time, then you need to sell at the right time, or vice versa. If you knew the future you could sell all your investments at the market peak, hold cash during the steep decline and then buy back in at low prices. Unfortunately, the market is unpredictable—big returns can come out of nowhere, and missing those big return days can cost you.
In a separate article, Dimensional Fund Advisors Vice President Weston Wellington writes: "Over the 25-year period ending in 2021, a hypothetical $100,000 invested in the stocks that make up the Russell 3000 Index would have grown to $1,036,694. But during this quarter-century, missing just the best consecutive 90-trading-day period (which ended June 22, 2020) shaved the ending wealth figure by an alarming 33%."
Doing the math on that difference shows a more than $300,000 difference in value from pulling money out of the market during that 90-day trading period of 2020. It was a very difficult and scary time to be a market participant and yet the best decision was and still is to keep a long-term investment focus.
The trouble is, nobody knows when the best days will happen. Sitting out of the market for any length of time could turn out to be the most expensive mistake you've ever made. The only guarantee is to have a strategy that enables you to have the confidence to thrive through both the ups and the downs.
TrueNorth Wealth is here to help.
If you're interested in working with a fiduciary CFP® professional to help outline your unique investment plan, complete with a custom investment portfolio to deliver your financial goals, then TrueNorth Wealth is here to help. To learn more or schedule a no-cost consultation, visit the website at TrueNorthWealth.com or call (801) 316-1875.
