Over the last few years, global stock markets have been jostled by many factors, including violence in European cities, Britain’s expected exit from membership in the European Union, the Chinese economy, and the Federal Reserve's stance on interest rates.
The good news: If you have a long time to stay invested, and you are invested in a diversified asset mix that reflects your time horizon, financial situation, and risk tolerance, you can ride it out.
But ignoring the stock market noise and sticking with your investments isn’t easy. In fact, the human brain is hardwired to be wary of uncertainty. While that might have helped in the past, it’s a risky instinct for investors.
When you are investing for the long term, even historic downturns can look like blips on longer‐term graphs. For example, the crash of 1987 sent the S&P 500 Index careening down about 20% in a little over four days.1 When viewed on a chart of only a couple of months of data, the drop looks large. View it in the context of 40 years of returns, however, and the drops are back in perspective.
The bottom line? If you are a long‐term investor with a solid plan, your best strategy is likely to stay the course.
So the next time stocks take a dip, consider these four strategies to stay calm and focused on the overall goal—getting your money to grow over the long term.
No one runs away when prices go down at the grocery store: When there's a sale on your favorite food, you stock up on it. Investments can be similar. If you liked an investment enough to choose it in the first place—and you still feel that way—a down market gives you the opportunity to potentially buy more of it at a lower price.
Sure, it can be tempting to think you can avoid stock market volatility by selling your investments and buying them back when things settle down. But it can be very difficult to pinpoint market bottoms or tops. Things can change fast, and missing part of a rebound could have you buying back your investments at a higher price than when you sold them. That would be selling low and buying high. Remember that you want to do the opposite.
So continue to make contributions to your UC 403(b), 457(b) and/or DC Plan. Making these regular, equal investments over time is known as systematic investing. There could be an advantage with this approach: You could end up with a lower cost per share, on average, than if you had invested larger amounts less frequently.
The “secret sauce” in long‐term investing is time. When you’re young, time is on your side. You can always save more money, but you can't get time back.
Why is time so important to your long-term plan? The answer is compound returns. In UC's 403(b), 457(b), and DC Plans, your returns are reinvested. So if your money earns a return, that extra money goes back to your account, and then it has the chance to earn returns, too. Hopefully, your balance will eventually accelerate.
Let's take a step back. Long‐term investing requires a plan. It can be a complicated plan involving many stock and bond funds or even individual securities—or it can be a simple one using a target date fund or managed account service. Generally, investing in a diversified mix of stock and bond funds or individual securities is an important part of successful long‐term investing.
No matter what your approach is, remember that you chose your investments for very good, long‐term reasons; when the market is fluctuating in the short term, those reasons should still be there unless your circumstances have changed a lot. In general, whether it's a crisis in Europe, a stock market downturn in Asia, or uncertainty around the Federal Reserve, your strategy as a long‐term investor shouldn't change because of short‐term market gyrations.
Studies have shown that investors may underperform the market over time due to buying and selling at the wrong times. For instance, independent research firm DALBAR conducts an annual study of investor returns. For the 20‐year period ending in 2015, researchers at DALBAR estimated that the returns of the average stock mutual fund investor trailed those of the S&P 500® Index by more than 3.52%. The explanation? Investor behavior: selling investments when the market is down and getting back into the stock market after prices have gone back up.2
Doesn't it feel good when you check your account and see that it's up? Peeking into your account after a drop doesn't. Short circuit your impulse to flee stocks by not checking your investment as often during periods when the market falls.
Until you actually sell your investments, any gains or losses are just on paper. If you do sell, you’ve effectively locked in those losses. Selling investments may also cost money, in the form of trading commissions or redemption fees—but those costs are small potatoes compared with the opportunity cost of being out of the market. So, stick with your plan and stay invested. You'll probably be better off in the long run.
Stock market volatility happens. Large drops happen. Market downturns may be upsetting, but history shows that the U.S. stock market has been able to recover from declines and can still provide investors with positive long-term returns. In fact, over the past 35 years, the market has experienced an average drop of 14% from high to low during each year but still had a positive annual return more than 80% of the time.3 The takeaway is that over time, the market has gone up most of the time over the long term—just not in a straight line.
Set up an investment plan based on your time frame, financial circumstances, risk tolerance, and goals to help weather anything the market throws at you. Once you're on the other side of the volatility, chances are you'll be really happy that you stuck with your plan.
1 Carlson, Mark, Board of Governors of the Federal Reserve, "A brief history of the 1987 stock market crash with a discussion of the Federal Reserve response."
2 DALBAR study: DALBAR is an independent, Boston‐based financial research firm. Using monthly fund data supplied by the Investment Company Institute, DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) calculates investor returns as the change in assets after excluding sales, redemptions, and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period.
3"Six strategies for volatile markets," Fidelity Viewpoints, March 22, 2017
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Indexes are unmanaged. It is not possible to invest directly in an index.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Past performance is no guarantee of future results.
Investing involves risk, including risk of loss.
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