SmartPlan Blog
Three things to do if the markets have you spooked
Do the markets have you spooked? Jennifer Foster, Investor Coach at SmartPlan Investing says, "There are more than just ghosts and goblins that are spooking investors this October."
While no one can predict market ups and downs with 100% accuracy, October has historically seen more volatility than other months, this is known as the October Effect. Unfortunately, this volatility can really spook investors. When investors get spooked it can often lead to them selling their stocks and fleeing to cash, or perceived safety. This is known in the industry as Market Timing. It is an attempt to get in and out of the market at the right time to avoid big losses and capture big gains. The problem is- it seldom works as one expects. It does seem logical that if your money is dropping as it did early in 2020 that you would want to stop the bleeding. Here are a few of the problems with that. First, how low did it get before you realized it was a problem? By the time you did -the values had likely dropped so much and if you sold your investments you likely sold at a loss or low price. You probably know this, but you make money by buying the investment at a low price and selling it at a higher price. So that's the first problem, you likely bought high and sold low. Right now you might be saying, " yeah but I'm going to get back in when it's "safer". "This means one of two things: either, you think you or someone can predict when the market is going to go up and think you'll get back in just before, and in time for the run-up. The other likely option is- once the market has gone up enough, for long enough you'll feel safe to re-enter the market. By this time you would likely miss most of the gains. This is the trap many investors find themselves in.
According to the *Dalbar Research Study on investor behavior, the average stock investor earned 5.04% from 1989 - 2019 with inflation at 2.47% leaving the real return of investors at an average of just 2.57%. The study goes on to state that the average holding period for a stock market investor is about 3.5 years. Investors simply struggle to stay the course long term because they get spooked!
Regardless of knowing the simple rules to invest- for example: buy low and sell high- investors struggle to do it. Why? Because we're human. Because emotions and instincts make decisions for us. Don't believe me. Have you ever tried to lose weight? The formula is simple. Move more and eat less, but it's really hard to do when you love chicken wings and chocolate cake. The rules are simple, yet how many people are overweight in America? That's another topic, but you get the point. Don't fool yourself into thinking you got this.
If the markets have you spooked here are three rules to follow. They are simple but hard to follow. Good news, my team and I are here to help. 2 Timothy 1:7 says: For God gave us a spirit not of fear but of power and love and self-control.
1. Get Coached - Love
2. Don't Stress - Self Control
3. Rebalance - Power
Don't stress over market volatility. What's down today can be up tomorrow. Markets move fast and furiously, you can make up a year's worth of losses in just days. But you have to be in the game to win. With any game, there are rules. In investing, you can follow a scientific approach to the rules, or make them up as you go along-the choice is yours. Investing is a life-long journey, and you'll have to endure some short term declines. However, there are common risks many investors and their advisors take. These can be very destructive, and most don't even know it. If you want to find out what they are, join us on October 22, 2020, from 4:00 - 5:30 pm for a special event "Three Warning Signs You May Be Speculating." You will discover how to identify these pitfalls and steer clear of them for a lifetime. It's like learning to ride a bike, once you discover what balance is - you never forget.
Lastly, when volatility happens- we'll rebalance. We discuss rebalancing in more detail in our Separating Myths and American Dream coaching sessions; however, simply put- each section of our portfolios is designed to be a certain percent of the portfolio. If and when a section or "Asset Class" gets out of its target range, the portfolio needs to be rebalanced. A SmartPlan portfolio does this systematically and without emotion. Typically there are a ton of different biases that play into investors' emotions, and you are no more in control of them than growing your fingernails. This does not benefit investors; in fact, these biases often lead investors to make decisions they will later regret. This is the vicious cycle we talk about often, chasing after something, it not turning out, having regret, doubt, and anxiety- yet doing it over and over hoping for a different outcome. This often results in a life with no peace of mind around money.
Remember, don't stress or get spooked. It won't fix anything. If you are interested in how Investor Coaching can benefit you on your wealth journey visit our events page for more information, here.
Endnotes:
References to DALBAR in this article are based on this DALBAR's Quantitative Analysis of Investor Behavior "QAIB" study: 'Quantitative Analysis of Investor Behavior, 2020'. DALBAR, Inc. 31 December 2020. Print.
Dalbar, Inc. (Dalbar) is a leading independent expert for evaluating, auditing, and rating business practices, customer performance, product quality, and service. QAIB uses data from the Investment Company Institute, Standard & Poor's (S&P), and Barclays Capital Index Products to compare mutual fund investor returns to relevant benchmarks. Using monthly data on mutual fund sales, redemptions, and exchanges, Dalbar created a measure of investor behavior it calls the "average investor". The "average investor" analysis is used to calculate "average investor return" for various periods, which is then compared to relevant index returns. Mutual fund investor returns were prepared by Dalbar using data supplied by the Investment Company Institute which takes into account all fund fees and expenses. See 2020 Dalbar Study.
