There’s no doubt that last week was a wild ride for the stock market. On Monday morning by the time our markets opened there was a major sell off that had already occurred in Asia and Europe. As a result, when our markets opened, the Dow Jones Industrial Average immediately dropped 1,000 points. The roller-coaster ride continued throughout the day and, in fact, at one point as the market rallied, it appeared that losses would be nominal. It didn’t turn out that way as the market retreated late in the day. The roller-coaster ride in our markets as well as world markets, continued throughout the week. After tough days on Monday and Tuesday, not surprisingly, world markets rallied on Wednesday and Thursday. In fact, if you just look at the results last week you would have said it was a relatively good week since the Dow Jones Industrial Average, the S&P 500 and the NASDAQ all showed gains for the week.
Investors tend to think when the markets experience extreme volatility there’s something that they should be doing. In reality, when the market is extremely volatile, generally, the best course of action is to do nothing. One of the benefits of having a balanced and diversified portfolio is the fact that the portfolio contains many different investments and they don’t operate the same way. Balanced and diversified portfolios are built to withstand market volatility. Markets are volatile and unpredictable and as an investor, we have to accept that fact. If you’re the type of individual who can’t take any sort of volatility, then unfortunately, you are only going to invest in things like CDs, and we all know the return on those is minuscule.
Whenever there is a major downturn in the markets, investors are gripped with fear and they make irrational decisions based upon that fear. After all, just think how much it would have cost you if you decided to sell out Monday morning when the Dow was down 1,000 points. It is not easy being an investor. Not only do you see the losses on your portfolios but in addition, we are swamped by the doom and gloomers who tend to dominate our media. Unfortunately, there’s nothing we can do about that. We all know that bad news sells and when markets are retreating, the doom and gloomers come out of the woodwork and the result is that too many investors make irrational decisions. The bottom line, world markets can turn on a dime and making a move that will give you short-term comfort may give you long-term pain.
As an investor you must have discipline. You cannot afford to react to every twist and turn in the market. It would be great if we could time the market and be in it when it is moving forward and out of it when it is retreating. As great as that would be, the reality is it doesn’t exist; it can’t be done. To be successful you must have a game plan based upon your individual goals and objectives and you must have the discipline to not let the chatter either in social media or in the traditional media cause you to lose focus on your individual goals and objectives.
Whenever the market is volatile and moving in the wrong direction, people get nervous and panic. That is understandable. However, you should always keep in mind what Warren Buffet once said, “it’s not timing the market, it’s time in the market that will make you successful.”
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at email@example.com.