While we do not believe in simplistic solutions, we emphatically believe that by sticking to some fundamental principles we can all ride out the inflation-induced market volatility we are experiencing right now and come out ahead – in the long run.
Whether you’re a seasoned investor in your 60s or older, or a relative newcomer, the notion of investing in the stock market without volatility is as illusory as a car without an engine. Like it or not, the two concepts invariably go hand in hand. But does that mean you should avoid volatility – and investing – altogether?
The short answer is no. Market uncertainty can naturally cause panic and lead to poor investment decisions. Yet, by recognizing short term market uncertainty for what it is, you can help ensure that it doesn’t derail your long-term goals.
To some readers this kind of observation might sound self-serving, the equivalent of a ‘hang in there’ suggestion that favours the markets at the expense of those who, like us, invest in them. But it’s not. In truth, it’s the only sensible strategy – albeit one that demands patience and fortitude – that pays off.
Here are five principles all investors should consider during these uncertain times.
1. Keep Calm & Carry On.
- Try to remain objective about your investments and avoid rushing into hasty buy/sell decisions in periods of market uncertainty.
- Loss aversion – the fact that we all tend to feel financial losses more acutely than financial gains – needs to be recognized and corralled at times like this.
- Stay focused on your long-term goals.
2. Stay Invested. It’s Time, Not Timing.
- Trying to time the ups and downs of the market is a dicey game at best, as the chart below proves.
- Sitting on the sidelines can be a costly mistake. As the chart below demonstrates, over a 10-year period, that if you’re out of the market for even a small number of days when the market is outperforming, you can substantially reduce your return potential.
- Staying invested, while not always emotionally reassuring, tends to pay off in the end.
3. Manage Risk, Don’t Avoid It.
- Investment risk is unavoidable. If you’re going to fixate on something, fixate on loss of capital. And you need to be careful with this idea, too.
- Remember, paper losses are just that – paper losses. They don’t count unless you sell.
- Maintain a balanced portfolio – typically consisting of a considered combination of equities, bonds and cash, based on a thoughtful asset allocation and maintained over time.
- A balanced portfolio has historically resulted in fewer negative returns compared to an all-equity portfolio over the long term.
4. Put Diversification to Work.
- Diversification is key. Mixing investments in a portfolio is designed to lower risk. One asset class that performs well, depending on economic and/or market events, counterbalances another that does less well.
- In other words, don’t put all your eggs in one basket. This is a widely recommended risk-minimization strategy.
5. Take Advantage of Dollar-Cost-Averaging.
- According to Forbes: “Dollar-cost-averaging is a strategy that can help you lower the amount you pay for investments and minimize risk. Instead of purchasing shares at a single price point, with dollar cost averaging you buy in smaller amounts at regular intervals, regardless of price. Over the long term, dollar cost averaging can help lower your investment costs and boost your returns.”
- Dollar-cost-averaging doesn’t always produce a higher return versus lump sum investing, it’s a systematic approach that can help investors stay the course by taking the guesswork out of when to invest.
Our Recommendation: Talk To Your Credit Union Financial Advisor
There’s no miracle cure for managing market ups and downs during a period of inflation. The key is to adopt a series of proven linked strategies that enable you to ride out the volatility and come out ahead in the long run.
Your credit union financial advisor can help. They bring a vital element of objectivity to the investment process, not to mention experience. The experts at Coastal Community Private Wealth Group, Coastal Community Credit Union and Interior Savings are ready to take your call.