In times of uncertainty it’s important to remember, control what you can control. I read an article recently about the hoarding of materials that has occurred during this pandemic and the thought process behind it. It all comes down to control, or at least the illusion of it. Having hundreds of toilet paper rolls isn’t necessary but it gives people a sense of control during unprecedented uncertain times.
If you are a young professional, this may be your first experience with extremely volatile markets. Take control of your financial situation by focusing on these three tips.
Don’t watch from the outside
When markets bounce up and down, we try to guess when the market will be at its low. Obviously, that’s impossible. The only way to ensure that you don’t miss the best days in the market is to be invested. According to the Ned Davis Research group, a fully invested stock portfolio in the twelve months following a bear market earns a total return of 37.1%. However, if you were on the sidelines for the first six months of this rebound your total return would have been 7.6%. You may think, “Well I wouldn’t miss six months, maybe just a couple days.” That can also be detrimental to your overall return. In the last twenty years from January of 1999 to December 2019, if you stayed invested in the S&P 500 index you would have an average annual return of 6.06%. If you missed only the 10 best days, that average annual return drops to 2.44%. What’s even more eye opening is that if you missed the 20 best days, your average annual return would have been 0.08%. The only way to ensure you participate in the best days are to stay invested.
Dip your toe in the water
Even though tip number one is about being in the market, we know emotions come into play. You may not be able to get over the mental hurdle of throwing a chunk of money into a volatile market. You can utilize a strategy called dollar cost averaging. Dollar cost averaging is when you invest money at a regular interval and purchase shares regardless of whether the price is up or down. Investing automatically can help to minimize the emotions of a volatile market.
Let’s say you wanted to invest $2,400 into a Roth IRA this year but you aren’t comfortable investing it all right away. You can invest $200 a month and purchase shares on a schedule. The graph below shows how dollar cost averaging may also be able to help you accumulate more shares. If you were to invest $2,400 in January at $10.00 a share you would have 240 shares total. In the illustration below, doing it over a 12-month period gives you a total of 244.15 shares.
Once you decide the amount and frequency that you are comfortable with, you can utilize Guided Wealth Portfolios to help you take the guess work out of automatic investing.
|Month||Amount Invested||Share Price||Shares Purchased|
|January||$ 200||$ 10.00||20.00|
|February||$ 200||$ 9.50||21.05|
|March||$ 200||$ 8.50||23.53|
|April||$ 200||$ 11.00||18.18|
|May||$ 200||$ 10.50||19.05|
|June||$ 200||$ 10.00||20.00|
|July||$ 200||$ 10.50||19.05|
|August||$ 200||$ 9.25||21.62|
|September||$ 200||$ 9.00||22.22|
|October||$ 200||$ 11.00||18.18|
|November||$ 200||$ 10.50||19.05|
|December||$ 200||$ 9.00||22.22|
*this chart is a hypothetical illustration and does not reflect an actual client’s results
Focus on the long-term
Everything we see and read during volatile markets seems to incite fear. It can be hard to put things in perspective when everything seems to be negative. It’s important to focus on your time horizon. When you have 20 more years to go before you need income from your account, you can better tolerate fluctuation. You have more time to allow your account to rebound from a downturn. No one likes seeing their accounts go down but remember you don’t need the money currently. You planned to use this money at a much later time which is why you were allocated this way to begin with.
Going through bear markets is never fun. Keeping perspective and focusing on your overall goal and time horizon can help you to be more comfortable when they inevitably occur.
Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a Registered Investment Advisor, member FINRA / SIPC. Other advisory services offered through Redwood Financial Network Corp, a Registered Investment Advisor and a separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including the loss of principal. No strategy assures success or protects against loss.