Your Portfolio is Down: Don’t do Anything Foolish...
As you may be aware, the recent volatility in the global stock markets has made some investors nervous, frustrated, and fearful. More often than not, when left unchecked, these emotions can lead to wealth crippling outcomes. Surprisingly, these losses of wealth are not market driven - they are behavior driven.
In October of 2007, the Dow Jones Industrial Average closed at 14,164. Barely three months later, on January 22nd, the Dow hit at 11,509. Wow! That drop was nearly 19%! Should you be crying in the streets, shrieking in despair because your portfolio is down over the past three months? I think not...
Try this: You want the stock market to go down. Actually, you need the stock market to go down.
The sophisticated investor knows this: We get compensated for our patience with market fluctuations in the form of higher average long-term rates of return. More simply put, your grandmother’s savings account earned only 3% or so because she didn’t want to “lose” any money. She couldn’t handle fluctuations, and therefore she didn’t even earn enough to outpace inflation.
Unfortunately, your sweet grandmother was fighting the wrong battle. She was trying to preserve her capital instead of trying to preserve the purchasing power of her assets. Consider the example where she puts $10,000 in her savings account at 3% and leaves it there for 30 years in a world that averaged 4% inflation. 30 years later, that $10,000 would only be able to purchase $7,400 worth of goods. Sure, her account balance would look great at just over $24,000, and she would have succeeded in her quest to earn interest and to never “lose” any money. The problem is she lost purchasing power along the way and now she’s packing up her things to move in with you because she’s run out of money.
Understand that in the pursuit of long-term returns that outpace inflation you will have to weather market fluctuations with patience and resolve. The U.S. Market averages a down year about once every four or five years. Does it make sense to get frustrated and upset every time we have down year? I don’t think so... as savvy investors, we expect these fluctuations.
Getting mad about a down year in the stock market makes about as much sense as getting mad when it rains outside. A rational person understands that rainy days and down markets happen from time to time and that doesn’t mean you shouldn’t venture outside or that you shouldn’t invest responsibly in a diversified portfolio.
Now that we’re thinking rationally, it’s very important that we are fully cognizant of the mistakes that ill-advised investors make during temporary market declines. A temporary market downturn is likely going to make you want to “do something” and “take action” to assuage your fears and try to change the way you feel. It’s a natural and expected response to the apprehension that a fluctuating market will manifest.
Invariably, the action that investors want to take is to sell their investments to prevent further losses. They feel better because they are “doing something” – yet they have just made the classic mistake of locking in losses and missing out on the inevitable market recovery. Let me be clear, it is the knee-jerk reactions of irrational investors that cripple wealth, not the fluctuating market. Remember, you need the stock market to go down from time to time so that you can patiently build wealth while others fight the wrong battle.
In October of 2007, the Dow Jones Industrial Average closed at 14,164. Barely three months later, on January 22nd, the Dow hit at 11,509. Wow! That drop was nearly 19%! Should you be crying in the streets, shrieking in despair because your portfolio is down over the past three months? I think not...
Try this: You want the stock market to go down. Actually, you need the stock market to go down.
The sophisticated investor knows this: We get compensated for our patience with market fluctuations in the form of higher average long-term rates of return. More simply put, your grandmother’s savings account earned only 3% or so because she didn’t want to “lose” any money. She couldn’t handle fluctuations, and therefore she didn’t even earn enough to outpace inflation.
Unfortunately, your sweet grandmother was fighting the wrong battle. She was trying to preserve her capital instead of trying to preserve the purchasing power of her assets. Consider the example where she puts $10,000 in her savings account at 3% and leaves it there for 30 years in a world that averaged 4% inflation. 30 years later, that $10,000 would only be able to purchase $7,400 worth of goods. Sure, her account balance would look great at just over $24,000, and she would have succeeded in her quest to earn interest and to never “lose” any money. The problem is she lost purchasing power along the way and now she’s packing up her things to move in with you because she’s run out of money.
Understand that in the pursuit of long-term returns that outpace inflation you will have to weather market fluctuations with patience and resolve. The U.S. Market averages a down year about once every four or five years. Does it make sense to get frustrated and upset every time we have down year? I don’t think so... as savvy investors, we expect these fluctuations.
Getting mad about a down year in the stock market makes about as much sense as getting mad when it rains outside. A rational person understands that rainy days and down markets happen from time to time and that doesn’t mean you shouldn’t venture outside or that you shouldn’t invest responsibly in a diversified portfolio.
Now that we’re thinking rationally, it’s very important that we are fully cognizant of the mistakes that ill-advised investors make during temporary market declines. A temporary market downturn is likely going to make you want to “do something” and “take action” to assuage your fears and try to change the way you feel. It’s a natural and expected response to the apprehension that a fluctuating market will manifest.
Invariably, the action that investors want to take is to sell their investments to prevent further losses. They feel better because they are “doing something” – yet they have just made the classic mistake of locking in losses and missing out on the inevitable market recovery. Let me be clear, it is the knee-jerk reactions of irrational investors that cripple wealth, not the fluctuating market. Remember, you need the stock market to go down from time to time so that you can patiently build wealth while others fight the wrong battle.
posted by Triton Wealth Management at
4:37 PM
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