While stock market indexes have declined recently, history shows they always recover given time. Just as Chicken Little wrongly assumed that one acorn falling on his head meant the sky was falling, you would likely be incorrect if you thought a few proverbial acorns falling in the stock market mean you should impulsively change your long-term investing strategy.
When you decided how to meet long-term goals, you established an investment strategy for the long-term. That’s still off in the distance, so what’s changed?
A Challenging Time
It’s easy to see how some would think the sky is falling after what we have endured over the past couple of years. A pandemic that wanes but still hangs on created supply chain disruptions that made everything from toilet paper to new cars hard to find. Russia’s invasion of Ukraine led to further difficulties, as energy supplies dwindled and prices skyrocketed.
As a result, the Dow Jones Industrial Average, Nasdaq and the Standard & Poor’s 500 Index all declined more than 20% from their highs, the trigger line that signals a bear market. Throw in the highest inflation rate in 40 years followed by rapidly rising interest rates designed to tame inflation and you have a recipe for volatility.
Bears Eventually Hibernate
You don’t have to look too far back to remember the last bear market. At the onset of COVID-19 in early 2020, stock prices fell like a rock, shedding about one-third of its value in a month.The recovery was just as dramatic and relatively quick, as stocks regained losses before year-end. If you had invested for the long haul and sat on your hands during this time, all of this volatility would have meant nothing in the end.
However, not all bear markets recover so quickly. Declines precipitated by the financial system meltdown in 2009, the dot.com crash exacerbated by the terrorist attacks in 2001, and a handful of other post-World War II events lasted longer. Still, they typically recovered anywhere from a few months to a couple of years. In fact, bear market recoveries average about 10 months. In other words, markets always recover, although past performance doesn’t guarantee future results. Still, long-term investors who bought and held once again would have noticed little impact on their investments.
Look at the Long Term
Because history shows it is almost inevitable that markets bounce back over time, you need to consider your investment strategy compared to your timeframe. Consider the following to determine if your long-term strategy continues to make sense:
- Review Your Goals – Have your goals changed? Does inflation mean you need more time to invest? Or perhaps you have downsized your expectations, maybe scrapping that trip around the world you fantasized about, and your investments will need less time.
- Revisit Your Time Horizon – Maybe you’re nearing retirement and aren’t the least bit ready for it. Maybe high inflation and low investment returns have you pushing back your goals a little. Your strategy is a living document, so it can change with your goals or time horizon.
- Check Your Investments –If you invest in a company whose long-term prospects have taken a dive, it’s okay to look in another direction. But it usually is not the best idea to abandon ship by moving completely out of stocks. In the past, those who have sold their stocks in the middle or at the end of a downturn had a tough time making up for their losses. Remember that equity investing is designed to provide the potential growth you need to meet your financial goals while also serving as a counterweight to inflation.
- Rebalance Your Portfolio – It’s not hard for your portfolio’s asset allocation to barely resemble what you started out with when you have market gains like most of us have seen in this century. Unless you regularly rebalanced, your portfolio is likely more stock-heavy than you initially wanted. Rebalance regularly and you’ll keep your asset allocation in check.
Buy and Hold
If market volatility has unnerved you, step back and consider the reasons why and how you started investing. Remember that “buy and hold” is a real investment strategy designed for those investing to meet long-term financial goals.
We know investors who regularly insist they “lost money” every time the market has a down day. In fact, they “lost” nothing unless they sold a losing stock immediately after a decline. They “lost” nothing if they practiced “buy and hold,” a state of mind that lets you avoid the heart palpitations that come with daily dwelling on the ups and downs of the market.
The Bottom Line
Having a long-term strategy makes short-term volatility a non-event. There are always tactics and opportunities, if you can ride out the volatility and be thoughtful about what you need to do to achieve your goals.
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