The market’s been quite volatile over the past several months. The talking heads on TV have been proclaiming it’s a bear market, with 2008-esq declines on the horizon.
In this environment, it’s easy to lose your nerve and consider bailing on your investment strategy, or at least curtailing your monthly investment contributions to your retirement accounts.
But the truth is hard to swallow – volatility is the just price you pay for investing in the stock market.
While it’s a rollercoaster ride, especially in terms of emotions, historically you would have earned 8-11% in a well-diversified portfolio over long periods of time. And by long periods we are talking more than 5 years. Not just a couple of months, or even a couple of years.
As I mentioned in the last post, I strongly recommend you stick with the long-term strategy you’ve decided upon, even if the next few months or years are volatile.
During the accumulation phase, your investment process consists of making periodic contributions that are invested into a sound strategy. Even the soundest strategies will not always seem that way, with long periods of drawdowns and losses. If you stop your contributions, you are breaking the process. This rarely leads to a better outcome.
To do that, it helps to know the history of market returns. Consider the following examples:
- From 1973 through 1974, the S&P 500 Index lost a total of 37%. Over the next five years, it returned almost 15% per year. And over 25 years, it returned more than 17% per year.
- From April 2000 through February 2003, the S&P 500 Index lost an even greater total—more than 41%. Then, from March 2003 through October 2007, the index returned more than 100%, providing an annualized return of more than 16%.
- From November 2007 through February 2009, the S&P 500 Index lost a still-greater total— more than 46%. Then, from March 2009 through November 2015, the index returned 227%, or more than 19% per year.
But if you can hang in there, you will be rewarded with the juicy long-term market returns.
Pulling out and sitting in cash until you are comfortable with the volatility is a losing strategy. You cannot predict when you get positive or negative returns, and trying to time your entries and exits leads to missing out major returns.
If this volatility is making you lose sleep at night, maybe it’s time to adjust your asset allocation. Adding some more bonds, while lowering your long-term returns, will reduce the volatility and prevent you from making catastrophic mistakes.
What are catastrophic mistakes?
Selling out of your long-term holdings due to short-term volatlity definitely fits the bill.
Keep calm and just carrying on investing!