Normally, I tell clients to expect at least one 10% drop in the stock market each and every year. We recently went through one of those dips at the end of 2018. Like anything, you have to take the good with the bad. A sudden decline in the market can be a breeding ground for investor mistakes that can cause big problems for your financial plan in the long run. The stock market has become increasingly volatile lately, which can lead to some bad investor behaviors.
There are two main parts to investing: Investment Returns and Investor Behavior. You can only control one of the two. Your behavior.
Here are a few investing fundamentals I’d like to share with you. Some are so simple they are often overlooked and ignored.
1.) You don’t receive bonus points for making things overly complicated. I had a client with about 50 accounts all over the place. Every time he had extra money, he opened a new account. The problem was that he bought basically the same thing in each account. On that note, a well-managed and diversified portfolio can be simple and easy to maintain. He thought he was diversified, but he was just making his life difficult.
2.) Your portfolio doesn’t care if you look at it every day. I have another client who checks his portfolio on his iPhone multiple times each day. This is a waste of time. The only real benefit (if you can call it that) is the occasional spike in your blood pressure, which may reduce your life expectancy and result in less money needed to fund your long-term retirement plan. The market going up and down is a normal thing and should be expected.
3.) Change your portfolio when your personal facts change.Generally, big changes to an investment strategy should be made when your life situation has changed. Perhaps you’ve reached the home stretch for retirement or the extra money from your home down payment is being re-positioned for new financial goals. Avoid making drastic changes to your portfolio based on some big story you heard on the evening news or a hot stock tip you heard at a cocktail party. There is no reason you need to reallocate your 401(k) over and over again with no rhyme or reason.
4.) “It depends” and “I don’t know” are the answer to many financial questions. I often get asked, “Should I do A or B?” It depends. I can give you the best answer with a little more information. On the other hand, I don’t know any prominent psychic financial planners. (I’ll admit I haven’t looked.) While the stock market has traditionally trended upwards, I don’t know what the stock market will do today, or for that matter, how it will perform in the next month. I don’t know and really no one else does either. But what I do know is how to help you build a plan that will help you reach your financial goals. That is probably a lot more relevant to you than how many points the stock market moved today.
5.) The market goes up, the market goes down, and we will have recessions on a fairly regular basis. Every year winter comes, the temperature drops, and then things eventually warm up again. Just like the temperature, the market will fluctuate. If your investments move more than you can stomach, consider a more moderate portfolio. But, don’t ditch the market all together.