When the stock market has a downturn, many investors go into panic mode, selling off parts of their portfolio to avoid temporary drops, and then missing potential gains when it bounces back.
For example, last December the S&P 500 dropped by a whopping 9%, one of the worst Decembers for investing performance since the Great Depression. A dramatic downturn to be sure, but the upside to the story was the day after Christmas it enjoyed its best performance since 2009. Still, the downturn seemed to have more of a negative impact on many investors than the subsequent rebound did.
Headlines Influence Investor Behavior
Undoubtedly, dramatic news and events can negatively affect investor behavior and cause them to park their money on the sidelines rather than keeping a long-term perspective. In fact, recent headlines about President Trump’s declaration to increase tariffs on Chinese goods caused the market to roil over fears of a trade war. All indexes dropped significantly in a single day — the Dow by 750 points, the S&P 500 by 3% and the NASDAQ by 3.5%. And while the market is rebounding, some pundits are predicting another grim December, unless the Federal Reserve makes more rate cuts. Others believe 2020 is going to be a great year, with double-digit returns.
So what are average investors to believe? But more importantly, what should they do?
Don’t Be Ruled By Fear
The truth is stock market fluctuations both up and down are inevitable. All investments, even conservative ones, carry some degree of risk, and past results are no indication of future performance. However, history has shown that investing in stocks has been a proven way to build wealth over time. In fact, stock investing has provided average annual returns of more than 10%, compared to 6% for corporate bonds, 5.5% for Treasury bonds and 3.5% for cash or cash equivalents such as short-term Treasury Bonds.1
Of course, riskier investments — such as stocks come with higher rewards than cash or cash equivalents such as share certificates, money market accounts or treasury bills do. The trick is to develop an investing mix that balances these risks and rewards.
Rely on Diversification
Asset Allocation is a time-proven investment strategy that involves diversifying different asset classes in your portfolio. This will allow you to better weather stock market declines and take advantage of upswings. And rather than selecting individual assets classes on your own, a popular way to diversify is to invest using mutual funds, which are accounts professionally managed by experts who determine the mix of stocks and bonds based on the given investment objective of the fund. Deciding which mutual funds are right for you should take into account your individual investment goals, time horizons and tolerance for risk.
Do You Have a Plan in Place?
While you can’t control the market, you can control your own decisions. Don’t let doom and gloom headlines drive them. Nobody can really predict what the market’s going to do, so having a solid plan will keep you on track no matter if it’s a bull or bear market or somewhere in between. It’s also wise to review your strategy and asset allocation mix at least annually.
Focusing on retirement savings should be one of your first long-term goals. There are several ways to do this via an IRA, 401(k), 403(b) or 457(b). By investing a portion of every paycheck, you use a strategy known as dollar-cost-averaging, allowing you to buy more investment shares when prices are lower and less when prices increase.
Get Advice When You Need It
One of the great things about being a SchoolsFirst FCU Member is having access to advice designed to help you work toward building lasting financial security. Our team of professional advisors are ready to help you get on track to planning for all your financial needs. For more information and to schedule a complimentary consultation visit schoolsfirstfcu.org/advisors.
- The Reality of Investment Risk Source: FINRA
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