Does Stock Market Volatility Worry You?
The recent volatility in worldwide stock markets reminds us that stock and mutual fund prices can and do fluctuate frequently and sometimes wildly. Indeed, coming on the heels of one of the best years for investing in several generations (2013), the market’s recent gyrations appear that much more unexpected and severe. The fact is that stocks are among the most volatile of all investment asset classes, but they also provide the most growth over time, especially relative to inflation. They illustrate the underlying tenet of investing: if you want more return, you need to take on more risk. If you are worried about your portfolio right now given the recent volatility, here are four likely reasons and some simple ways to overcome them.
- You’re too focused on the short-term. Do you like to read your brokerage or 401(k) statements every month, put the balances into a spreadsheet, and add up your total net worth? If so, then every bump in the investment road will be magnified. The simplest solution is to stop reviewing your holdings every month and start doing it every quarter. If you don’t need the money right now, it shouldn’t make any difference how frequently you count those dollars. And if you are retired and utilizing your portfolio for living expenses, you should be following a withdrawal strategy that insulates you from short-term market ups & downs. In either case, by making this simple change in behavior you’ll discover that your investments are not bouncing around quite as much as you thought. (Turning off the TV will also help you avoid the daily manic-depressive pronouncements of the financial media).
- You don’t have a retirement plan. If the market drops 10%, you can easily calculate how much money you’ve lost on paper. But money sitting in an IRA or a bank account has no real value to you. It’s what you want to do with that money that should be of greatest importance. Without such a plan, you can’t know the impact of those losses on your future goals. With such a plan you can change your thinking from “I’ve lost 50 thousand dollars” to “I’m going to have to give up travelling every other year after I retire.” Which way of thinking makes you less fearful?
- You don’t have an investment strategy. If you’re investing your savings and consequently putting your money at risk it ought to be for a good reason. Otherwise why take on the risk in the first place? Typically you want to grow your savings enough to support the various goals you have for your family’s future. But how do you know how much risk to be taking? From the retirement plan above you can create an investment strategy uniquely suited just to you that balances your need for growth with your tolerance for risk. Having such a strategy helped a lot of my clients not only overcome their fears during the dark days of late 2008 but also avoid making dangerously wrong investment decisions based on emotion.
- You worry about everything. Do you avoid going out in public in San Francisco because the Ebola virus has been detected in Dallas? Do you sit up nights worrying about whether proposition 46 will pass or fail? Are you afraid to drive on the freeway? This is a tough one to deal with. Have you tried meditation?