Life seems a lot less complicated when the stock market is going up or holding steady, doesn’t it? We’ve all weathered the intense storm of market volatility over the past couple of weeks, and there are a lot of folks out there ready to hit the panic button. I’ve seen people in the past be petrified over a mere 1% to 2% sell-off, but this time of unprecedented volatility is a whole other story.
Watching the Dow Jones Industrial Average dip by 10% and some of even the most iconic blue chip Dow stocks go down by over 20% last week undoubtedly has had masses of investors ready to run–or more likely sprint–to the nearest exit.
This can be a dangerous time for investors, especially if you’re not prepared for the kind of market we’re in right now. These are the times when I see so many costly mistakes happen. If you are invested 100% in stocks, you are feeling a tremendous amount of pain. If you’re an investor that doesn’t really know where you are invested, or why you are invested in certain areas, then it’s likely that you are very frustrated and nervous about the environment that we are in.
So…what’s an investor to do?
Corrections aren’t easy to live through. Up markets feel a heck of a lot better than down markets, but you’ve got to be in a position where you have confidence in what you’re doing, or else you really shouldn’t be invested in anything. I can tell you from experience that this is not the time to mess with your original investment strategy. If you do, it’s very possible that you’ll dig yourself into a massive hole that you can’t get out of.
Here is what you need to understand: at this point, it’s all about balance and keeping calm.
Fundamentally, our economy is doing well, but we can’t expect to see a market that goes down 1,000 points one day to be immediately followed by a market that goes up 1,000 points the next day.
It’s going to take some time. During that time, it’s important to remember these three absolute must dos:
1. Diversify, diversify, diversify
Diversification is the key to mitigating risk. We’ll take last week as an example. It was a bad week for stocks, and that’s just a fact. But almost every bond category wasn’t just flat, they were UP. If you have a balanced portfolio of stocks and bonds, your pain last week was a lot less than someone who was 100% invested in stocks.
I’m not saying that diversification will prevent all pain…it’s a lot like Kevlar. Kevlar will stop a bullet, but it doesn’t mean you’re not still going to be hurt. Bonds were your Kevlar last week. LQD was up ½ %, BND +.6%, BIV almost a full 1%. Utilities were only down 1%, like SO. So if you have a 40% stock and 60% bond portfolio, even in what was a brutal week for stocks, you were only down 1.9%…bruised, but alive to fight another day.
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2. Keep in mind that corrections are necessary and temporary
Corrections are a healthy way for the market to reset itself, particularly in an overheated stock or bond market. In theory, corrections will prevent much larger sell-offs down the line. While even the most balanced portfolios will be down during the time of a correction, the good news is that stocks don’t stay down forever.
History has shown us that through all of the S&P 500’s crashes, falls and plummets, recovery has eventually happened, making corrections temporary. But just like a broken bone, corrections take some time to heal. Fortunately “time to recovery” may be less than you might think. Consider these statistics:
- There have been a full 14 10-20% corrections since 1965.
- There have been another 11 corrections of more than 20%.
- For the 10%+ corrections, it takes about 4 months on average
- For the 20%+ bear markets, it takes about 24 months on average
As you can see, markets get hit all of the time. But, they also recover all of the time.
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3. Remember that long-term investing wins…big
Chances are, you’re not going to get wealthy sitting in cash, nor are you going to live out your retirement dreams sitting in cash. In fact, your money will dwindle if it sits in cash for 10, 20, or 30 years. However, if you have the patience, perseverance, and confidence to stick to a strategy that you know is solid (income investing in high quality stocks and bonds), and if you do your planning right, you won’t run out of money. If you aren’t on the right track already, it’s time to get on the right track now so that you can live with the way that you are invested.
In times like this, it’s important to position yourself in the best way possible to avoid the pain. Personally, a good mix of solid stocks paying solid dividends along with high quality corporate bonds are keeping me sane during this time of extreme market volatility. I have a combination of three areas working together: 1) diversification at work; 2) income through dividends, income, and distribution at work, and 3) knowing that I have a plan and a strategy that works over time.
Because I feel confident that these three areas are working together, I don’t get bothered when we have weeks, months, or even years like the last few weeks. I’m OK with it and know that it’s the pain that we have to go through to be successful at this. It’s a lot like running. No one ever said it was easy, but you feel great when you’re done.
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Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.