Yahoo Finance How to Stay Calm in an Uncertain Market
When markets misbehave, we feel queasy and we struggle to sleep soundly. But knowing the facts and understanding certain data will provide you with perspective. Staying calm prevents you from making irrational, short-term decisions that could derail your retirement. This information can help keep you sane when the markets -- and the media -- appear anything but.
Success starts with a plan. The key component to financial success is having a plan. Unfortunately, only 21 percent of couples have a retirement plan to avoid outliving their savings, according to a recent survey of 1,051 couples by Fidelity Investments. People with a plan are twice as likely to expect to live a "very comfortable" retirement, according to the survey. A plan will also keep you calm when times are tough and counteract the emotions that a volatile market can bring.
Missing the best days is costly. There is always the temptation to get out of the market now and buy back in later once the financial markets have stabilized. The problem is the timing of when to get back into the markets.
Market timing can be a costly exercise. Over the 20-year period between 1995 and 2014, missing the five, ten or 20 biggest gain days of the S&P 500 would lower your total return by approximately 40 percent, 59 percent and 81 percent, respectively. It is hard to believe that 20 out of over 5,000 trading days could derail over 80 percent of your return, but the data is compelling.
You could make the argument that missing the worst days of the markets can also be extremely beneficial. But the task of choosing the worst 20 days out of 5,000 is nearly impossible for the average investor, especially if you take into account that, historically, markets move in a positive direction. The average investor is rewarded for staying the course and remaining invested.
Recoveries happen fast. The first month of the dot-com recovery from October 9, 2002 to November 8, 2002 saw the S&P 500 return 15.2 percent, and the following 12 months of recovery generated 33.7 percent. The recovery from the great recession was even more dramatic. The first month of recovery (March 9, 2009 to April 9, 2009) generated a whopping 26.6 percent, and the year of recovery rewarded investors with a 68.57 percent return. The size of the recovery can typically be attributed to the steepness of the downturn. Again, the markets tend to reward patient investors.
You are not as smart as you think you are. The average investor is lousy at investing, according to the Boston research firm DALBAR. DALBAR's analysis of investor behavior found that the average equity mutual fund investor has underperformed the S&P 500 by 47 percent over the last 20 years.
Investors also appear to be ignoring the concept of long-term investing, because the average holding period for equity funds is 4.19 years. For many investors the emotional reaction to fear and stress is to flee the situation. This is the opposite of "buy low and sell high." A simple refresher: If the goals for your investment capital will not allow you to keep your money fully invested for five to seven years, you do not need to invest in financial markets.
Investing can be stressful when your investments are losing money. Volatility and market swings are features of investing that are never comfortable, but a necessary element to the long-term success and growth of your financial assets. A good way to understand the process of being an investor is to visualize that investing is a long-term journey where an investor is walking up a mountain with a yo-yo. The yo-yo is bobbing up and down, but the investor moves to higher ground as the journey continues.
A dose of fear can be a good exercise to re-evaluate your financial life. Some of the key components of success include creating a road map for your finances, a healthy level of cash reserves and diversifying your holdings to reflect your age, income and long-term goals. If you find that you are short on any of these items or you feel overwhelmed with the choices, then also consider enlisting the help of a professional financial advisor.
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, " The Money-Guy Show ".
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