The stock market is volatile by nature as prices change all the time. Historically speaking, the market tells us we should expect a 5% decline roughly three times a year, a 10% decline once a year, and a 15% decline every two years. Bear markets, typically defined as a 20% decline, generally happen every three years. Notice that it’s only the negative volatility that we’re concerned with. No one ever complains about volatility to the upside.
It has been since March 9, 2009—more than nine years ago—that we’ve seen a bear market. We’ve been coddled and began to believe that the continuous positive returns are normal, but we’re talking nine years out of 92 years of recorded market history. Volatility is normal, expected and even needed.
Nearly everyone is emotionally charged during times of high volatility. It’s your money and your financial future you’re watching decline. It’s the actions that you take during that emotion that define you as an investor. This is why most investors seek out a financial adviser to provide a third-party, unbiased opinion to help make unemotional decisions with your money.
When investing in the stock market, you should be taking a long-term view. Our general investment recommendation is that money you believe you will need within the next 10 years should be invested in fixed-income investments; money not needed within 10 years should be invested in growth investments like the stock market. Furthermore, we recommend buying high quality, financially sound companies that are at least rated “A” by Value Line for financial strength, at least “2” by Value Line for safety, or at least “A-” by Standard & Poor’s for quality. We recommend stocks with the intent of holding them for a long period of time.
If you believe that your strategy and investment selections are sound and the market is healthy, company fundamentals are intact, economic indicators are strong, there should be little reason to doubt your strategy when you see volatile short-term market movements.
Yet almost every investor questions if they are doing what they should be doing, or if they should be making changes when their portfolio isn’t performing as expected. However, if your investment strategy is viable, volatility is no reason to change course.
One of the most common mistakes is giving into fear. It is undoubtedly difficult to open your statement to see you had $100,000 invested, and it is now worth $50,000. However, one thing we feel investors need to remember is that it is not when you buy, but when you sell. The tangible value of the companies has not gone down—it is just what the market shows at this point in time. If you sell, you realize the loss. If you ride the storm out, your stocks have the potential to rebound. You just cannot time the market.
By following the principles of our Ten Year Rule, investors know that they will have 10 years of uninterrupted income provided by the fixed-income portion of their portfolio. Investors who are living off their investments understand that they are not pressured to sell investments at low levels; rather they have time on their side and can wait for the market to recover. Once the market recovers, they can then begin to replenish money withdrawn from the fixed-income side.
In other words, when the markets are climbing higher every minute, every investor feels he is smarter than the average bear. It’s the market’s rough patches that separate the savvy investor from the crowd. If you have questions regarding your financial strategy, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
