You’ve likely heard a few clichés when it comes to investing: stay the course; buy right and hold tight; time is more valuable than money; etc. The point is clear, if your investments align with your goals, timeline and risk tolerance, then there may be no reason to make changes to your portfolio when the markets experience volatility.
After all, we can’t control what happens in the markets, the economy or in Washington, but we can control our own investment decisions and our temperament.
For an idea of how quickly the market can recover, just look at the Dow Jones Industrial Average (DJIA) following some historically difficult periods. After the market crash of 1929, the market began its steady climb back to positive returns within one month and reached its previous levels within six months. Throughout history, the DJIA has come back from crisis declines to double-digit returns (on average) within the ensuing 12 months.
Investors tend to react to a market decline in one of two ways, either by panicking and selling or freezing and doing nothing. The hold-steady types often fare better when holding for the long-term. In the case of someone in or nearing retirement, who doesn’t have time to wait for markets to recover, staying the course may not be the practical decision.
Another concern for those in or nearing retirement is what many financial advisors call “sequence risk,” which is basically withdrawing too much income after a period of market decline. Draw too much too early in retirement, and you’re more likely to run out of money. On the other hand, if a market decline occurs further along in retirement, that risk may be reduced.
Over the past 35 years, the stock market has experienced an average drop of 14 percent from high to low during each year, but still had positive annual returns more than 80 percent of the time. Hypothetical illustrations show that since 1980, an investor who was out of the market for just 10 of the best performing days may have earned less than half of the portfolio’s earning potential.
Staying the course is not always easy, especially when your account balance is declining. One way to help counter this impact, called dollar-cost averaging, is to keep contributing and, in turn, buying increasing numbers of shares at lower prices so that the balance can rise despite poor performance.
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