If you put your mind (or really your emotions) to work on it, you can always find troubling signs in the stock market. The late summer swoon accompanied by increasing volatility has brought many of these worries front and center. One way we practice financial stewardship
is not to pull clients back from the brink, but rather to make sure they never get close to the panicky edge in the first place.
As I write this just a few days before Labor Day, the broad S&P 500 Index is about 5% off ALL-TIME high levels reached in July. That’s 5%, not 25%; What are fear-struck investors going to do when a normal double-digit pullback occurs?!
Volatility is an Opportunity
The chart below shows the calendar year returns and intra-year declines since 1979. During this almost four-decade span, the average intra-year decline was about 14%. Yet, in 32 of the 39 full calendar years, the broad market was positive for the year. Volatility is common, to be expected, and required for premium returns to accrue. Volatility actually presents an opportunity rather than a threat.
Source: Dimensional Fund Advisors
Here are 5 Tips for Staying Calm:
1. Don’t fall into the trap of thinking about the past few days or few weeks. Recall your medium term and longer-term goals. Remember why you are investing
and what you want your future to look like.
2. Just like consuming sugar all day is unhealthy, consuming financial ‘news’ all day is bad for your wealth. Stop cueing your emotions
with information that likely has little or no relevance to you.
3. Sometimes you may be ‘sick of the market’, but getting out of the market and thereby failing to outpace living cost increases (inflation), will make you feel much worse.
4. Instead of brooding over what has happened recently, shift your focus to imagining that you are just starting out
as an investor. What do you want? What are the next steps?
5. Intellectually understand that the future is always unknown
and that volatility is just the way this is resolved in the market. Growing your invested principal requires ‘risky’ assets today in order to create safety tomorrow.
Don’t Lose Sight of Your Goal
On the first trading day of 1960, the S&P 500 opened the day (and the year) at 58.03. As I write this, the S&P is 2885, almost 50 times the 1960 value! Yes, it was even higher a few weeks back but let’s not lose sight of the main point: Your money will either outlive you, or you will outlive your money. Start there.
Related: Is Trust Your Largest Risk?