Unless you’ve been living under a rock, you’ve probably heard about the ups and downs in the stock market that’s been going on the past couple of months.
Should you be worried about it?
It’s a hard question to answer but today I’m going to try and dispel some common beliefs and help you understand that it doesn’t matter. In only a few circumstances should you be worried.
What is market volatility?
Volatility is the opposite of stable, it means there is a lot of change taking place. Almost all assets see volatility at some point in time. From real estate to bonds, commodities to the stock market. Volatility is the most famous in the stock market.
These day-to-day and sometimes month-to-month fluctuations in the market are normal occurrences.
If you have an investing strategy, the ups and downs of the market should not phase you. It shouldn’t even be worth bringing it up in conversations because you have the confidence that if you stick with your plan for the long run, you’re going to be better off.
Investors get hurt when they start trying to time the market.
“It’s not about timing the market that matters, it’s about time in the market.”
Some people may be successful in predicting market changes but it’s very unlikely because they have to be right twice. When they sell and when they buy.
This is nothing new. Market corrections are as predictable as the rising of the sun.
Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.”
So why all of the ups and downs?
Volatility can start to creep in when investors start to feel uncertain about the future when it comes to things like interest rate risks, trade wars, company leadership changes, political changes, etc. Each of these are going to happen at different points in time. Sometimes they can seem a little scarier than other times.
How does it affect young people?
If you’re young, the markets dropping could be the best thing for you. You may have just started investing some savings and you’re worried because it seems to keep dropping.
The reason that this could be a good thing if you’re young is that you are buying stocks at a discount. For example, if you just put money in an investment and you see it drop 3% it may hurt because it appears 3% of your money is now gone. But if you’re putting money into an investment every month, the next month, the same investment is now 3% cheaper. One successful approach many young people take is investing a set number, for example, $150 a month, no matter what, even if the markets are up or down. This takes the stress out of it because you’re sticking to a long-term plan.
How does it affect old people?
If you’re old, the markets dropping could be the worst thing for you. The reason most financial advisors suggest that people approaching retirement start transitioning their investments into a more conservative investment with bonds is because bonds are less risky. You’re less likely to have your money grow fast but you also won’t lose money as fast if you just invested in 100% stocks.
A stock market crash could be devastating for someone getting close to retirement because they don’t have time to recover and the money they currently have saved for retirement won’t be able to sustain their living expenses. This is exactly what happened in 2008 when the market crashed. A lot of older people had to keep working because they lost such a large percentage of their portfolio.
Why you shouldn’t care
The bottom line: Such reactions (or overreactions) are not unusual. Day-to-day market volatility is part of the normal market cycle. Not getting caught up in the day to day churning of the market is actually one of the best things you can do as an investor.
Despite such big occasional falls, stocks historically have risen significantly over the long run. So your best bet is to stick with them and give your portfolio a chance to recover.
This is not specific investment advice. I have not assessed your personal situation. Please consult with your financial advisor for specific recommendations.
