The biggest news this year is the roller coaster ride of the stock markets — recently, the stock market has been anything but predictable—setting many on edge.
Here’s what happened
Unpredictable is probably an understatement—stocks tumbled 10% in the first few weeks of 2016 and the first 12 days of 2016 were declared the worst-ever in terms of stock returns since 1897.
What it means for you
If you’re like most people, the recent stock market volatility may have made your stomach drop. It’s hard to watch your portfolio drop 10% and not want to panic and pull your money out. But as it turns out, that’s actually the opposite of what you should do. This might seem counterintuitive, but if you’re in you’re in your 20s, 30s, or 40s, this volatility might actually be a really good thing for you.
Yeah, you heard right— long-term investors might even see this as an opportunity to snatch up bargain stocks. If you’re 20, and assuming an average life expectancy of 80, you have a 60-year investment horizon. And the good news is: over the long-term, you’ll be fine. You have decades to recover from losses—what’s more, studies show that over periods of 18 years or more, there hasn’t been a period where the stock market hasn’t had higher returns than bonds or cash. So turn off the news, and tuck in for the long haul.
What you can do about it
Experts recommend that you take this opportunity to make sure that you have a risk-adjusted portfolio that is in line with a set investment strategy personalized to your goals and tolerance for risk. This strategy, called an “investment policy statement” should outline how much to invest in different asset classes (US small and large cap stocks, international stocks, investment grade bonds, and even alternative assets like real estate securities) given your personal preferences—and stays constant no matter fluctuations in the market. This statement, rather than your emotions, should dictate when you sell and buy to rebalance your portfolio.
This has been proven historically—in various market declines, investors who panicked and sold when the market dropped ended up missing out on opportunities to 1) buy at a deep discount, and 2) ride out the gains when the market recovered. As another side note—most of the market’s 10 best days over the last 20 years were within just 2 weeks of the 10 worst days. Again, unless you’re willing to bear the pain of market drops, you won’t be able to reap the rewards of eventual gains.
The only caveat here is that if you do have assets that you will need in the short-term (say, you’re looking to retire in a couple of years or need money as a down payment for a house you’re buying next year), you might need to tweak your strategy slightly. Best strategy here is to sit down with a financial advisor and figure out how much to pull from long-term accounts and invest safely—probably in lower risk investments such as short-term government bonds or a money market fund. Remember: the priority here is to minimize losses, not actively pursue gains.