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When market volatility is headline news and account values start to fall, it’s easy to understand why investors get jittery. Even with a boatload of historical data to support us, in times of stress we all struggle to overcome our natural tendencies to make poor decisions about money.
Investing in the capital markets gives us a fighting chance to enjoy a comfortable life and a dignified retirement. But with it comes a dilemma: we must undertake risk to meet our financial needs, yet we are psychologically ill-equipped to do so. So how do we balance human needs versus human nature?
Investors are often told to “invest for the long run.” Instructions like “buy and hold,” “ignore the noise,” and “stick to the plan” sound great, but fail to recognize that market volatility disrupts even the best laid plans.
Conventional wisdom says that stocks return “about 10% per year.” There’s a grain of truth to that, but it doesn’t account for what investors really experience in the market. Stocks can be very volatile in the short term, producing large performance swings. It’s only over multi-year periods that the distribution of stock market outcomes narrows and we approach long-term historical averages.
Stock markets trend up over time, when measured in decades or centuries. Over shorter periods, however, investing can feel like a roller coaster. When markets decline 20%, 30%, or even 50%, it becomes very difficult to maintain a long-term mindset. As the image shows, bull markets tend to climb slowly over time, while bear markets occur abruptly and without warning. Even long run investors must be prepared to endure significant market declines.
Smart investing requires the right mindset and the right plan. A combination of steady investing, (Dollar Cost Averaging), occasional rebalancing, and enjoying the benefits of positive compounding are likely to set investors up for wealth growth over the long term.
This fascinating white paper from Virtus discusses a variety of behavior and cultural factors that influence the way we think and act about money, including fear, greed, expectations, discipline, luck, and much more. Once you’ve had a chance to read through it, give our office a call if you still have concerns or questions. We want you to feel confident about how your financial plan is constructed to weather the storms.
Past performance is not indicative of future results. Source: Ned Davis Research. © 2022 Ned Davis Research, Inc.