Today’s headlines scream bad news about big volatility in the stock market. We all love upward volatility, but downward volatility triggers fear and worry. However, volatility (both directions) is a completely expected part of investing. In fact, tolerating volatility is the price of investing. Since we cannot control the volatility of the markets, we better control the volatility of how we respond. If we let volatility drive our investing decisions, we’ll pay a big price. Good returns are the icing on the investing cake…and working on our response to tough times is eating our vegetables.
We’ve battled volatility before; remember 2008? As today’s market rocks and rolls, let’s turn the calendar back 14 years and remember the painful lessons we all learned then. In May of 2008, the news was horrible! Bear Stearns had collapsed, Freddie Mac and Fannie Mae were teetering, and over-extended Lehman Brothers would declare bankruptcy in 4 months. News around the dinner table was no better; jobs were shaky and home values were falling.
Here’s a short list of lessons learned from 14 years ago:
- Diversification and allocation matters. A portfolio made up of diverse holdings means you’re not depending on any one asset category to do the heavy lifting. Though we’ll never get rid of risk and volatility, a properly diversified and allocated portfolio can help reduce the chaos of difficult markets.
- Don’t try to time the market; it’s impossible to pick the best day to buy or sell. Lots of nervous investors sold in 2008 and locked in losses with no chance to recover. Don’t fall prey to the idea that “I’ll reinvest when the market calms down.”. When the investing waters look calm, you’ll likely be buying at much higher prices.
- Tame the bulls and bears with patience and perseverance. During our investing lifetime, each of us can expect about 14 bear markets. The good news is that bear markets are relatively short-lived compared to bull markets. Bear markets tend to persist for a year or a bit more. Bull markets tend to hang around for several years and produce gains that more than make up for a bear market’s losses, but only if you stay invested.
- Be careful and conservative about debt and spending. A whole lot of our 2008 misery stemmed from too many people and companies having too much debt. The key is the same old-school message of living within our means (sometimes easy to say, but hard to do!).
- Don’t let today’s stock market news distract you from getting other important life tasks done. So, update that old Will, start your kids’ college fund, plan that overdue vacation, get your kids to set up a ROTH account, and spend time with the people you love.
As we all navigate this rough market, we at LongView are in this with you and taking our own advice, too. As always, we are confident that wise financial planning and thoughtful investing is a winning combination.