In Uncertain Markets, Focus on What You Know

February 11, 2016

fb-4certaintiesIn uncertain times, we tend to focus on what we don’t know: will the market rally continue or are we due for a sell-off? Is a down market a routine correction or the start of a serious bear market?

It helps to remind ourselves what we do know.

Here are four certainties to keep in mind:

1. Stocks have been the best way to make money over time

We know that investing in stocks has been the best way to make money over time: since 1950, stocks, as measured by the S&P 500, have gained an average of 11% annualized compared to 6% for bonds.

In dollar terms, this means that if you’d invested $100,000 in stocks, your portfolio would have grown to $806,231 over 20 years – you’d have more than four times the amount you started with.

If you’d put that $100,000 in bonds instead, your portfolio would have grown to $320,713 after two decades.

Stocks have also had gains over every rolling 20-calendar-year period since 1950. 

Stocks have also been very volatile at times, and that volatility makes it tough for investors to hold stocks long enough to benefit from these terrific long-term results. But if you can stick it out, those gains can change your life.

2. Corrections are a normal part of long-term investing

We know that corrections are part of long-term investing. The market has declined at some point during every year since 1980, but in most years it has finished the year with gains.

And we also know that the market has even recovered from major sell-offs, like the devastating losses of 2008, the worst decline in most of our lifetimes.

intrayearfeb2016

Chart shows the S&P 500’s calendar year return and the largest peak to trough drop in that year.

3. Balanced portfolios can help manage volatility

We know that investing in a balanced portfolio that includes stock and bond funds can help us manage risk and stay invested, even during volatile markets. January 2016 was just one example: while stock markets around the world declined, many bonds had gains.

A 50/50 portfolio of stocks and bonds also had gains in all rolling five-, 10- and 20-calendar-year periods since 1950, while both stocks and bonds had some negative five- and 10-year periods.

And if you rebalance your allocation to stocks and bonds in corrections, you’ll have more participation in the eventual recovery than you did in the decline.

4. Most of us have time to recover from losses

We know that most of us have enough time to recover from losses and participate in long-term gains. Corrections can be particularly scary if you’re hoping to retire soon, but remember that you won’t spend all your money in the first year you retire. In all likelihood, you will tap into your portfolio over decades. And if you want to avoid running out of money in retirement, you’ll likely need some exposure to stocks.

Don’t Let Uncertainty Hold You Back

One risk in volatile markets is that people put off investing until they feel more certain about where the market’s headed or how the economy’s doing. But this really can hold you back: if you wait until you feel certain to invest, you’ll likely end up out of the market indefinitely.

The reality is, no one can know the future—even “smart” people who know far more than we do—and history shows that markets often behave differently than anyone expects. So let go of that expectation and focus on what you do know: that you need to grow your portfolio to fund a comfortable retirement, and that stocks remain the best option for growth and bonds can steady the ride.

History has shown that short-term events have little long-term impact on the value of stocks, and that the best times to buy stocks has been when everyone else is selling. If you’re looking to buy now, first consider how much risk you’re willing to take and then look for the best funds at that risk level. This is easy to do with NoLoad FundX: we separate funds into four risk classes and then we rank funds by recent performance so you can spot the leaders.

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Linda Madden February 13, 2016 at 3:39 pm

Thanks – good info

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