By Brian Boughner, CFA, CMT, Parallel Financial Partners
It’s only February, and 2016 has already brought us much pain when it comes to investing in the equity markets. Here are three important points to consider navigating through this volatile time.
1: The price of admission for investing in stocks is that there will be periods of losses.
So why do we own stocks? Because over longer periods of time, they have consistently grown in worth while outpacing inflation. Owning stocks means you own companies that are in the business of creating value, employing people and generating profits. However, it’s people with emotions that run these companies and own these stocks. So there are also times where stock prices experience volatility. And when that volatility is pointed to the downside, it’s no fun for anyone.
However, we don’t own stocks for very short periods of time. We own them for longer periods. We typically will not buy equities for a client if their time frame is less than 10 years. Looking at the chart below, you can see that since the late 1920s there have only been two periods where owning stocks over a 10-year period resulted in losses. So remember to not lose sight of the “big picture” when owning equities.
2: Investing in stocks without a plan is like wandering in the desert. It rarely ends well.
There are two types of plans you need.
The first is a contingency plan. While over longer periods of time investing in stocks tends to produce positive returns, you still need a plan to deal with extreme downturns. During times when stocks are dropping, utilizing stop-loss levels on your stock positions or adjusting your asset allocation to less volatile assets are examples of this. Having a plan in place here also eliminates the risk of making an emotional decision and selling at the lows of the market, which so many investors tend to do.
The second is your overall financial plan. How does your investment in stocks fit into the overall financial goals you are trying to reach? Whether retirement, paying for college, or a house down payment, all of your investments need to help you reach your goals.
I’m amazed at the number of investors who lack an overall plan and have no idea where they are at when it comes to reaching their goals. A trusted financial advisor can certainly help you here. A plan determines how you should be invested and how your investments help you reach your goals.
3: The media does no favors for you, the investor.
Do headlines with the words: “Market Mayhem” “Stock Carnage” or “Stock Market Bloodbath” bring any clarity or meaningful analysis to what is happening in the markets? Or do they feed on the investor’s emotions of fear? The media is not in the business to report accurate information that you can use to make informed decisions about your portfolio. They are only in the business to generate more views and clicks. They will use whatever means necessary to do this and most of the time that entails over-sensationalized headlines.
I recently read the headline “Oil below $30, $15 could be next.” Now, I know for sure the author has no way of knowing where the price of oil will go. But this headline will scare people into clicking it because of its extreme prediction of where oil may end up.
It’s also no coincidence that the headlines get the most outlandish near market turns. Near market tops, headlines are typically broadcasting the brightest and best, and the sky’s the limit. Near market bottoms, all you read is blood in the streets and that the worst is yet to come.
In the end, turn off your TV, and shut down any streaming real-time notifications you get about the status of the markets. If you absolutely have to read something, I recommend the good ol’ Wall Street Journal. Subscriptions can be pricey, so if you’re looking for something free, here are a few online market blogs I read weekly. They do a great job cutting through the noise and analyzing the markets. Please know I don’t make any money if you go to these sites and have no affiliation with them: awealthofcommonsense.com, fat-pitch.blogspot.com, capitalspectator.com.
So as we enter another volatile time already here in 2016, accept the price of admission for investing in stocks, make sure you have a plan – and please, please, please, turn off the media emotional roller coaster of noise.