This Is What You Should Worry About
- The bull market is 5 years old, making it the seventh longest bull market in history and 10 months longer than the median (though it still has seven months to go until it hits the average length).
- Quantitative easing, which has helped fuel the market over the past five years, is starting to come to an end.
- Analysts project the S&P 500’s earnings growth in the first quarter to be a meager 0.7%.
- Economic recovery is still tepid.
All are valid reasons why the market shouldn’t go any higher and why someone invested in stocks should be worried.
Are You a Scared Investor?
In the comments section of one of my recent columns, a reader suggested that only scared investors buy and hold.
As Gary Coleman used to say, “Whatchu talkin’ ‘bout, Willis?”
The opposite is true. It’s the mentally tough investors who are able to ride out market volatility, scary headlines and constant chatter about why stocks should go down.
And it turns out that those investors do more than three times better than average investors.
According to research firm DALBAR, over the past 20 years, the S&P 500 posted an average annual return of 8.4%. Yet the average investor only achieved only a 1.9% average annual return.
That’s because most investors get scared and sell when markets are selling off and don’t start buying again until they have more than recovered.
It wasn’t until the past six months when mainstream media began publishing articles and advertisers ran commercials saying, “It’s time to get back in the market.”
Now, this bull market very well may have a while to go. But those who are just now getting back in have missed a 180% move from the 2009 lows – which is likely close to where many investors bailed out.
Investors who ride out the highs and lows of the market over the long term participate in the greatest wealth-building vehicle in existence – the stock market. Over the long term, stocks go up. And they go up more than real estate, more than gold and any other asset category.
Even if you had invested in 2001 and cashed out right after the economic collapse in 2010, you still made money.
What You Really Should Be Worrying About
While market volatility can be scary, it actually hurts your investment performance to be paying too close attention to the day-to-day variance.
When it comes to the market, here’s what you really should be concerned about:
- Asset allocation – You should be diversified across asset classes (stocks, bonds, metals, real estate). That way if one asset, like stocks, underperforms, some of the others will likely pick up the slack.
- Having enough cash – You should have enough of your assets in cash to pay six months’ worth of bills if you were to lose your income. Plus, I suggest keeping any funds that you will need in the next three years out of the stock market. Put it in safe investments like CDs or money markets.
- Tax efficiency – Your accounts should be set up to minimize your taxes. You don’t have to be a CPA to do this. If you’re a long-term investor, be sure your income-producing investments are in tax-deferred accounts (IRAs, 401(k)s, etc.) and the investments that don’t produce much income (growth stocks, gold) are in taxable accounts. That way you won’t pay taxes on the income generated from the investments.
Investors who take these three steps will not have their emotions played with by the market like a 14-year-old dealing with his or her first case of puppy love. By not getting shaken out of the market, they’ll be able to capture bigger gains as opportunities arise.
It does take some intestinal fortitude to deal with the market’s ups and downs. But if your accounts are set up properly, you’ll be able to ride out the volatility knowing you’re going to make (and keep) more money over the years.