The last nine-and-a-half years have been a fairy tale for Wall Street. We are living in a time of record upon record highs, and a seemingly endless bull market. However, this story has not been without its drama. In fact, since the start of the bull market in March of 2009, the US stock market has seen 23 pullbacks greater than 5% and last week marked the 8th of more than 10%, which is considered a market correction. So while the stock market’s roller coaster of an October isn’t abnormal, the scent of vulnerability seems to be increasingly fresh.
While nobody knows exactly where the story will go from here, it’s inevitable that at some point the bull market will go bear. The principle ‘what goes up must come down’ applies, and so -- the plot thickens.
Like every story, this too has its cast of characters. Anyone following the news knows by name the most prominent figures of late: The Federal Reserve, China, trade wars, and tech companies, to name a few. Like any story, the reader has no control over what the characters do, or what will transpire next. We can have theories and read into potential foreshadowing, but we ultimately aren’t the author and simply don’t get to decide.
What’s different about this story is that it has a tangible, practical impact on us. Bluntly, what happens in this story directly impacts our pocketbook, our portfolios, and our net worth. If we aren’t careful, what happens in this story can creep into our emotions and our psyche. It can cause us to try and take matters into our own hands and possibly do things we shouldn’t.
But you knew all of this before you invested yourself into this book, because you read the prologue… right?
The prologue of this book is the ‘rules for long-term investing’. Don’t worry. I’ve given you my edited copy of the prologue below. This is for anyone who skipped over, has forgotten, or simply needs a refresher about what it means to enter into the story of investing in the stock market. It will help you stay steady when the market is anything but.
The knee jerk reaction to want to pull out of the market as soon as things get shaky is counter-productive. Remember, volatility is exactly why investors can demand a higher return in the stock market than they do on something like cash. There is no way to know for sure whether this is a temporary dip in the market or the beginning of a bear market, so it’s important to have an investment plan and stick to it.
It’s All About Time, Not Timing
The S&P 500 has had an average annual return of a little more than 10% since its inception almost 100 years ago. That’s a pretty good track record over a long period. It’s when investors try to time the market by jumping in and out that they can catch a bad run and can get themselves into trouble.
This doesn’t mean deviate from your plan and get out of stocks. It means quite the opposite, actually. The long bull market has subsequently pushed the stock-to-bond ratio in many portfolios heavier towards stocks. Rebalancing simply means coming back to your originally intended composition. Rebalancing isn’t something that should be done spur of the moment. You should consult a trusted financial advisor and typically set a number that triggers you to act. For example, whenever your mix reaches 5 percent off target then it’s time to rebalance.
Review Your Goals
There are many different vehicles for investing than just the stock market. Options like money market and high-yield savings accounts sacrifice the possibility of higher returns in exchange for more certainty and liquidity. A financial advisor can help you make sense of your short, middle, & long term goals and help you get invested accordingly. If you plan to access invested funds within 5 years or less, the stock market probably isn’t the best option.
The Rise in Interest Rates Benefits Most Savers
It’s easy to hear about rising mortgage rates and view it as negative. It can be more easily forgotten that those investing in things like savings accounts and bonds will see an increased rate of return when interest rates move higher.
Take Emotion Out of It
Do whatever you need to do to prevent yourself from getting worked up about the swings. Stop checking your 401K or IRA balances daily. Find a new homepage without a stock ticker, and whatever you do, refrain from clicking on news articles from doomsday writers – they get paid to write headlines and stories that elicit your emotions
Let Go of Control
Even though we like to feel like we are in control of our stock investments, we are not. In reality, we are in control of a lot less than we like to think, but praise God that He is in control of all things and is worthy of our trust!
While we can’t predict the future or what plot twists lie ahead, there are many things we can do to plan wisely for an uncertain future. If you don’t have a clear investment plan, I’d recommend you create one for yourself or work with someone who can – I’d be more than happy to help!
About Wacek Financial Planning
Founder, Ben Wacek, is a fee-only, Certified Financial PlannerTM who has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective, using Biblical principles. If you’d like to learn more about Wacek Financial Planning, please visit www.wacekfp.com.
Photo courtesy of Burak Kebapci on stocksnap.io.