Rising inflation rates and volatile stock markets are causing many investors to worry about the future of their investments. At the end of October 2022, the S&P 500 was down close to 20% net of inflation. The constant cycle of negative news can wear on an investor and make them feel like there’s no light at the end of the tunnel. Every market cycle has its ups and downs, but with a solid plan in place, you can weather any storm and come out on top.
Here are five strategies for thriving during this time of uncertainty.
1-Become a Market Historian and Not a Market Forecaster
There is no way to predict the future, so it’s best not to try. Instead, learn from what has happened in the past and use that knowledge to inform your decisions today. By studying market history and learning from previous downturns, you can gain a better understanding of what caused them and how they played out over time. This will help you make more informed investment decisions when similar situations arise in the future.
As we are in the midst of a turbulent market, it is a great reminder that most bear markets are short-lived. LPL Research found that the average bear market lasts just 289 days. The 1973-1974 bear market was the longest since 1928 and lasted 630 days (about 21 months). The stock market lost about 48% of its value during that period. (Seeking Alpha)
When you look at the S&P 500 Index since it was first calculated in 1926, 60% of all years have been positive. The 20-year annualized return is close to 10% (9.52%). Investors who maintain their discipline despite market fluctuations can reap the rewards of wise investment decisions. The point: averaged over time and across all markets, stocks are profitable investments.
By understanding the historical returns of the market, investors realize that market volatility, thought it may ‘feel’ like an eternity, in reality the volatility usually subsides and rewards investors who stay the course.
2-Make Sure Your Financial Plan Drives All Decisions
The biggest mistake investors make is not having a financial plan. A financial plan is simply a map that details how you will achieve your goals, including where you will invest, when you will rebalance, and what you will do when the market is volatile. The goal of the plan is to ensure you are making rational decisions when you want to do something with your investments that may be deemed irrational regarding your overall plan and strategy. Without a solid financial plan and strategy, investors are sure to make mistakes.
3-Understand Investor Psychology and Behavior
Investors are not robots, and that means they don’t always make decisions based on logic. In fact, investors often make mistakes based on emotions, which can lead to poor decision-making. The key is to understand the main drivers of investor behavior so you can avoid them yourself or use them to your advantage.
For example: Investor fear and greed drive market movements Investors tend to be more emotional than rational when making investment decisions—this is human nature! When markets are in a bull run, it’s easy for investors to get caught up in the excitement and forget about their long-term goals. Many people buy high during these times and sell low when things turn bearish again.
4-Turn Off the Wall Street Noise
The financial media is full of predictions, opinions, and advice about what you should do with your money. But most of it is just noise. The best way to keep from getting carried away by market movements is not to pay attention to them! If you can’t avoid reading the headlines or listening to financial news shows, try tuning out all the hype and focusing instead on what matters most: your goals and time horizon.
5-Write a Simple Personal Investor Policy Statement
What is an Investor Policy Statement?
A personal investor policy statement is a document that clearly lays out your goals, approach, and strategy for investing. It should be a working document you refer to regularly, especially in times of market turmoil or when making important investment decision; it is an important tool to help investors avoid the pitfalls of market timing and emotional investing.
Approaching investing with a clear and well-defined strategy is vitally important to long-term success. The best investors can maintain perspective and keep their emotions in check when others are panicking—they stick to their plan. By focusing on the five strategies, investors can weather any market and reap the rewards of discipline and focus.