By Kevin Theissen
Does investing strike fear in you? We once heard somebody say the word “fear” stands for “False Evidence Appearing Real.” That seems to apply to investing. Here’s why.
The stock market makes some people nervous. This can be especially true for young people who grew up during the Great Recession. Not only did these folks see market volatility at its worst, but they also came away with negative impressions about the financial markets in general.
The truth is that the market is neither a one-way ticket to instant riches nor a dangerous game for insiders only. There is risk involved in any kind of investment, but if you understand how the market operates in the long run, then the rewards can be significant.
By understanding the following three important facts about the market, you might be able to turn “fear” into “False Evidence Appearing Real” and not get scared out of letting your money work hard for you in the market.
Fact #1. The market tends to move in long cycles.
The amount of information we have at our fingertips makes it tempting to check in on our investments weekly, daily, or even hourly. As financial professionals, though, we take a much wider view of the markets. And while past performance is no guarantee of future returns, the history of the market continues to trend upwards.
Consider the S&P 500 Index. If we go back and look at all the bull (upwards) and bear (downwards) markets from 1926 to 2017, the average bear lasted 1.4 years and resulted in a 41 percent loss on average. However, the average bull lasted 9 years, and gave investors a 480 percent gain on average, according to First Trust.
When volatility strikes, patience is usually a good course of action. Your financial plan is designed to provide for the rest of your life, not for one bull or bear cycle. Instead of panicking when the market dips, try to think of volatility as a tax that investors pay on the wealth that the market can create.
And if you do find yourself checking in on your investments as regularly as you check your email, maybe think about uninstalling that app – or calling one of us.
Fact #2. Make consistent contributions to your portfolio.
Besides struggling to accept volatility, many people are skittish about the markets because they feel powerless. Money goes in, and decades later, who knows what’s going to come out. They feel that politicians, corporations, and geopolitical tumult will have the final say in how big their retirement nest egg grows.
However, oftentimes the biggest factor that determines the success of your investments is simply contributing new money on a consistent basis. As discussed above, the market will most likely trend upwards in the long run. The more of your money that’s along for the ride, the bigger those eventual gains will be.
For example, suppose that you decide to invest $10,000 every year for 10 years into your portfolio. In a flat market returning 0 percent, that $10,000 would account for 100 percent of your portfolio’s gains. In a modest market returning 6 percent per annum, that $10,000 would account for 73 percent of your portfolio’s gains. And even in a bull market, charging ahead at a rate of 12 percent, your $10,000 would still account for more than half of your portfolio’s gains, according to Invesco.
Fact #3. Focus on what you can control.
To be sure, part of investing involves accepting things you can’t control. A hurricane on the other side of the world might rattle the markets for a couple days. A large company might become embroiled in an accounting scandal. The Federal Reserve might make an unexpected interest rate move. Market corrections might follow.
But if you understand volatility and continue to focus on the big picture, you’ll start paying more attention to the things you can control, like a monthly budget that allows for automatic contributions to your investment and retirement accounts.
Better yet, think about setting a goal to ramp up the size of those contributions. Many people try to save or invest 10 percent of their income. Can you shoot for 15 percent? 20 percent? The bigger the contributions, the bigger the payoff when you retire. And if retirement isn’t on your radar, that big investment cushion will go a long way toward giving you a feeling of freedom.
Kevin Theissen is principal of Skygate Financial Group.