Log into your investment accounts or pull out your last statement. Take a look at your total balance. How would you react if that number was 5% less? What about 10% less?
We have experienced a rare—though not unprecedented—period of low volatility in markets. I cringe a bit when I hear people say that we are “overdue” for a correction, because it implies the market works on some sort of fixed schedule. Still, it would be very reasonable to expect a 10-15% reduction in stock prices in the second half of 2017.
I am not going to complain about the recent period of above average returns without much volatility, but the complacency of the average investor concerns me. It has been over a year since the last 10% drop in the S&P 500, which means volatility is out of our short-term memory. Many investors who panicked in 2008 or wanted to sell during the market corrections since then can no longer recall the intense fear they experience when markets downturn.
Seemingly sudden market drops teach us valuable lessons about our tolerance for volatility. When these lessons are forgotten we risk repeating investment mistakes. I would like to review several lessons so we are all prepared when—not if—the next correction comes.
- Review your allocation.
The more money you made on the way up, the more you will likely lose on the way down. Your best-performing holdings may become your biggest losers. If you have experienced an unusually high return over the last year, it may be worth looking at your allocation to determine if this is the right allocation when the market goes through a correction. If your holdings are up 20%, how would you react if you lost 20% in a 2-4 week period?
- News is not your friend.
The media benefits from the panic that typically accompanies a market drop. Dramatic headlines draw more eyeballs, which is good for their ratings and bottom line. The media does not provide advice tailored to your specific financial goals, and the financial “experts” who provide market commentary–often fueling the sense of panic–cannot predict the future any better than you.
- Refuse to respond emotionally.
Obsessively looking at your account balance is not helpful. Investors view their investments online more often during a market downturn. People who previously ignored their statements begin to log in daily to see the damage to their bottom line. You are more likely to make a poor, emotional decision after seeing your account at a loss. One of the greatest challenges in investing is detaching ourselves from emotions.
Not sure if you and your investments are prepared for a potential return to normal market volatility? Call John Moore Associates today at (888)815-5100 and talk to one of our financial advisors. Our investment management is evidence-based rather than emotionally-charged.
The information herein has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Brian Cochran and not necessarily those of Raymond James. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. Diversification and asset allocation do not ensure a profit or protect against a loss.