Many investors have stories to tell of their skill and experience in the stock market. However, many of those stories will also include their investment mistakes and how best to avoid them. The current market volatility is fresh breeding ground for lessons to be learned in trying to time the market, and for those who sold their investments in a panic, they may well be wondering when the best time to get back in the market may present itself.
The invasion of Ukraine by Russia triggered U.S. stock market swings with the S&P500 dropping as much as 2.6% before closing at 1.5% higher and the Nasdaq Composite recovered from a nearly 3.5% decline by rising about 3.3% in the same day. While some investors were looking for the opportunities to buy stocks on the “cheap,” others decided they preferred to wait out the volatility in cash. Research shows that many investors that are prone to sell off in volatility, unfortunately fail to get back into the market and thereby miss some of the best returns which often follow some of the biggest dips according to research from Bank of America. In fact, since 1930 missing the S&P500 10 best performing days every day led to a total return of 28% while those who stayed invested through those volatile days enjoyed a 17,715% return!
Approaching your risk tolerance with an eye to your financial objectives, can put your investing strategy into perspective. A key element will also include discussing your unique financial concerns with your trusted financial advisor who can help review your particular investment time horizon and your expectations. The tendency to ride winners and cut losers in short spurts can also influence your trading behavior. “Buy low and sell high” can in fact only be done by stocks that are cheap by under-performing. Looking at a stock’s behavior during the pandemic can also seem that it presents a template for how those stocks will perform during other future economic downturns. In fact, there is no single definition of “risk” that suits all clients, and there is no asset class that is proof against all the various types of risk in the market.
Establishing a risk tolerance and understanding your expectations for your time horizon is essential to weathering the volatile storms that may lie ahead. Whether there has been a change in your core values, goals or reasons for investing or not, establishing an appropriate allocation and dollar cost averaging back into the stock market with your trusted financial advisor is critical. Learning from past mistakes and sticking to your long term investing plan will ensure a well-reasoned path to a successful investment portfolio.
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Your Financial Planning Team
American Investment Planners LLC