It depends. But probably not on what you think it depends on.
Most people would assume it depends on whether they are approaching retirement and worried about needing income in the near future… or if they are already in retirement and concerned about running out of money… or they are building their retirement and want to only be in the market when it is going up and be out before the it heads down.
Believe it or not, it doesn’t depend on any of these things. Well, I guess it would if let it.
Did you know that no matter what time frame you look at S&P 500 historical returns, it always outperforms the average individual investor… and by a considerable amount. Want to Google something? Here it is. Take the thirty years ending December 31, 2013. The S&P 500 had averaged 11.11%. The average equity investor had only made 3.69%. 1.
Why is this? There are entire studies behind this question. They call it “Investor Psychology.” Repeated studies show that it is our emotions that get in the way. Think about it: All of the issues that give rise to your market concerns are based upon fear. There is a wonderful, insightful article I found while I was doing research to write this. I encourage you to take a moment and read it when you are done. The link is at the bottom of this commentary.
So let’s talk about the real reasons you should or should not be worried about the market.
The first elephant in the room is the question of whether we are headed toward a recession. No one has a crystal ball. Even those who say they got it right in 2001 or 2008 will probably never get it right again. However, there is one indicator worth watching. In the past - which we all know may or may not repeat itself - leading economic indicators have been very good signals of what is to come with our equity markets. These ten indicators start pointing South prior to recessions. Where are they today? As of the reports released on October 18th, they are in pretty good shape.
Second, let’s ignore the leading economic indicators for a moment. Pretend they were all saying recession or pretend we didn’t have them. Should you be worried about the market?
Only if you don’t have a plan. You need an emotion-proof plan with a disciplined process in place to help you achieve your goals—future retirement, income, or growth. What do Michael Jordan, Bill Gates and Warren Buffet have in common besides money? The answer is discipline. They didn’t reach success by making emotional decisions or decisions based on how the media is telling them they’re doing – up or down. They reached success by following their disciplines.
In 2000 we created an investment process that forces disciplines. And our experience since that time has taught us to be comfortable with our disciplines. After all, we have since been through two of the worst recessions in our country’s history. The core values of this process are:
- Educate. Market volatility is a normal part of investing, and the only bad news is that it will probably continue worsen throughout your lifetime. Unlike 20 years ago, trading is done with the click of a button today. And news travels even faster. The result? Technology + Human Emotion = Extreme Volatility. You have the potential to become your biggest risk when it comes to your portfolio. Remember the average investor returns? The more educated you become about your investments and your emotions regarding those investments, the lower this risk becomes.
- Get your risk right. What risk needs to be taken to achieve the return you NEED? We all want zero risk with a double-digit return. However, this is not reality. Everything has risk and risk has a hand-in-hand relationship with returns. The key is getting your risk right. What amount of risk do you need to achieve your goals? What amount of risk can you sleep comfortably knowing you are taking?
- Diversify risk, not just investments. Though diversification can’t protect against loss or guarantee any gains, proper diversification can curb an array of risk. We have found that too many investors – and even some advisors - take a very passive look at risk. Because there are so many types of risk, people often don’t understand what or how much they are actually taking. With that in mind, it’s important to understand various types of risk and diversify those risks in the same manner that most advisors diversify a portfolio through asset classes. Each sector, region, cap, and style imposes its own inherent risk. If you ignore the political, regulatory, business, systematic, nonsystematic, interest rate, currency, or inflation risk; that exact risk will be the one that ends up biting you.
- Buy low; sell high…systematically. Arguably the greatest investor of our age, Warren Buffet, tells us to “Be fearful when others are greedy and greedy when others are fearful.” If you are retired and have stopped buying into the market due to retirement, ask yourself “Why?” It’s critical to have a disciplined investment plan in place that works for you and continues to buy into the market during retirement. Confused? Check out Buy Low: Sell High—Great Advice, but Is It Really Possible in our on-line learning center at: www.kennedy-financial.com.
- Life happens. You change. The world changes. Your investments need to change. It is an absolute necessity to be proactive and not reactive. Otherwise, you do need to be concerned.
Wayne Dyer said, “You cannot always control what goes on outside. But you can always control what goes on inside.” We will always live in interesting times. It is sticking to our disciplines that will allow us to make the most of it. Remember today is the first day of the rest of your life. Plan for it!
Read Why Average Investors Earn Below Average Market Returns here: https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519.