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When the markets are showing volatility — and the talking heads are chattering away — many investors become transfixed by the spectacle. People who would not normally even think about the markets start bringing them up at the water cooler. Dinner conversations turn to the markets. And you might find yourself more frequently tuning into CNBC. But why?
If you’re a long-term investor and have a meaningful plan to reach your goals, the daily headlines shouldn’t matter. Yes, we want to be informed and be able to take part in conversations, but that’s not the same as letting the headlines affect your day-to-day behavior. Emotionally driven, knee-jerk reactions can be detrimental to your overall investment strategy.
The headlines can hit close to home, getting you thinking about important issues and the impact a down market could have on your life. Will you be able to retire? How much does the decline set you back? How does this affect your plan? The list goes on.
But you have to maintain perspective and think about your time horizon. Remember that your ability to time the market is much less important than the length of time you can be invested in the market. Staying invested is the only chance you have to recoup short-term losses.
Although 2015 has been challenging, prolonged periods of negative returns are rare. For instance, in the past 89 years, there have been only four stretches of time during which the S&P 500 had a negative annual return for more than one year in a row: 1929–32 (the start of the Great Depression), 1939–41 (the start of World War II), 1973–74 (the Arab oil embargo), and 2000–02 (the dot-com crash). So even if the market ends down for 2015, history suggests it will rebound in 2016.
Markets swing. Sometimes you invest on an upswing, other times on a downswing. At some point, you’ll be on the wrong side of a trade. That’s why it’s important to understand your personal time horizon.
You are more likely to stay the course if you have a solid plan with your advisor for what you want your portfolio to do for you. Your advisor will know when it is time to make tweaks to your portfolio — not because of market noise, but because of changes in the potential to achieve your goals.
In the current environment, keep in mind Warren Buffett’s advice: “Be fearful when others are greedy, and greedy when others are fearful.” There is no crystal ball. No one can predict what the markets will do next, but we do know that they will rise and fall over time. It’s difficult to remain a disciplined investor, but maintaining perspective and focusing on your long-term goals will help you do just that.
This article also appears on Nasdaq.
Image via iStock.