Investment Success: Three Points to Remember
While most of this year’s equity gains have once again been wiped away, it’s especially important for you to make certain that your investment portfolio is aligned with your risk tolerance. Retirement for most of us today may last decades. If you have a very long investment time-frame, say more than 10 years, remember that the best way to meet your retirement goals is by holding stocks — especially when they’re volatile.
Three Points to Remember:
#1 – STAY CALM
Market ups and downs are normal.
In fact, in any given year, the average drawdown (peak to trough decline) of the S&P 500 Index has historically been nearly 14%.
Though such favorable outcomes can never be guaranteed, it is clear that being calm and patient during periods of volatility historically has rewarded investors.
#2 – STAY IN
The returns realized during a calendar year are typically attributed to just a handful of upside trading days. An investor who exited the market and subsequently missed just 10 of the best-performing days in the past 20 years would have lost out on more than half of the gains.
MISSING THE BEST-PERFORMING DAYS OF THE MARKET CAN HAVE A SIGNIFICANT IMPACT ON YOUR PORTFOLIO
The pain of “loss” is said to be 3x more impactful than the joy of any gain, which results in a behavioral desire to “cut our losses” when the stock market declines.
Once you’re “out”, however, you’re faced with the difficult decision of when to get back in. And, unfortunately, the best days to get in are when the market’s already down and appears the most precarious, leaving many investors paralyzed and missing out on important upside days. For some, this inertia can even last for years and impact their long-term planning and financial success/failure in retirement.
Given the difficulty of market-timing, a far better course would have been to stay in, with the knowledge that volatility is normal and that missed upside can dramatically cut into long-term returns. The key to successful long-term investing is to remain invested.
#3 – STAY THE COURSE
For long-term equity (“stock”) investors, which includes most retirees, the most powerful factor is time: historically speaking an investor’s time horizon is directly correlated with the likelihood that a portfolio will experience positive returns. For long-term investors, staying the course is the most critical consideration when trying to build wealth and meet investment objectives.
We know that, academically, stocks provide the best longterm returns among financial assets – stocks, bonds & cash. Stocks provide growth to help us build wealth and, importantly, to help us retain our purchasing power, which can be eroded over time by inflation.
Stocks are also the most volatile of these financial assets and navigating declines in the stock market is difficult to do on our own.
Working with an advisor is very valuable not only to determine your planning needs and long-term objectives, of course but also to help provide perspective and reassurance during periods of normal volatility as well as the larger drawdowns that come (and eventually go) when an economic recession occurs.
For many of us, having some amount of cash on the sidelines to help us “sleep at night” as the market’s turn can be helpful. How much to keep is entirely personal and different for all of us, but the time to decide how much to set aside is not in reaction to normal stock market volatility, but rather when you’re working with your advisor to establish your long-term investment objectives.
It’s important to have this conversation if you haven’t to ensure that you can remain invested during both the ups and downs in the markets.
In the meantime, stay calm, stay in, stay the course and please reach out to your wealth advisor if we can help or if you have questions.
Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.
