So far in 2016 the markets have been unusually volatile. Through February the S&P 500 fell 10.27%, making many investors very uneasy and some outright scared. These feelings are completely understandable. By the end of March, the S&P had recovered and was up year to date. Those who sold or shifted to more conservative investments in February missed out on all or most of this dramatic recovery that came very quickly. History shows the stock market has been able to recover from declines and provides positive long term results. Over the last 35 years, the market has experienced an average drop of 14% from high to low during each year, but has had positive annual returns more than 80% of the time.
In volatile times, it is very hard to resist the temptation to go to cash (safe money) and wait for the right time to get back in. Picking this “right time” is as hard as picking the top or the bottom in a market, nearly impossible, without an incredible amount of luck. Many investors fall into this trap and it is almost always a mistake that can cost a lot of money. In fact, markets can turn in either direction very fast and one can be left sitting on the sidelines before they know it, missing out on a recovery.
Resist the urge to buy or sell based on market movements. Studies show that the historic returns on mutual funds are greater than the actual returns investors realize. Investors tend to get in after the funds have done well and exit when the performance is lagging. It is important to pick diversified funds with very good track records over longer periods of time and stick with them. This doesn’t mean to just forget them, monitoring them on a regular basis to confirm that their investment objective is being followed is important.
It is also important that you are comfortable with your investments. Some might have the time horizon to warrant a more aggressive asset mix, but if short term market fluctuations tend to make you nervous, then consider a more conservative mix. Sleep at night is important too.
Periodically review your portfolio and make adjustments as your risk tolerance and goals change. Rebalancing a portfolio as needed is good. Rebalancing is the selling of positions that have become overweight in your portfolio and moving the proceeds to positions that have become underweight. In other words sell high and buy low. If you would like the rebalancing of your portfolio to be done automatically, consider a target date fund or a risk based portfolio.