The World is Ending

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No - the world is not ending.

But everyone seems to think so - at least, for a few days in the last week. The recent market correction of over 7% has caused anxiety among investors.

The VIX (Volatility Index) was flopping around 12-13 for many weeks until it soared passed 60 on August 5th. Markets crumbled and most everyone freaked out.

It’s easy to feel unsettled when your portfolio takes a hit. However, it’s crucial to remember that market fluctuations are a natural part of the investment landscape - they are essential for long-term growth.

Market corrections are defined as a decline of 10% to 20% from a recent peak, and bear markets, which are declines of 20% or more, are not uncommon. Since 1980, there have been 12 bear markets. The key is to understand that these downturns are temporary setbacks, not the end of the road.

History Repeats Itself

To put the recent market decline in perspective, look at the past decade. The S&P 500 experienced several significant pullbacks during this period. In 2018, there was a correction of around 20%. Two years later, the market plunged over 30% due to the pandemic. And yet, in both cases, the market recovered and went on to reach new highs. Hooray!

This pattern is not unique to the last decade. Throughout history, we've seen countless instances of market downturns followed by periods of robust growth. The stock market is a long-term investment vehicle, and short-term fluctuations are to be expected.

The Importance of a Financial Plan

The best way to weather market storms is to have a well-defined financial plan. This plan should outline your investment goals, risk tolerance, and time horizon. By sticking to your plan, you can avoid making impulsive decisions based on emotions.

It’s also crucial to maintain a diversified portfolio. By spreading your investments across different asset classes, you can reduce your risk of significant losses. Examine our post about the 60/40 portfolio, which weathered this downturn better than an all-equity one. Diversification helps reduce volatility, smoothing out the ups and downs of the market.

The Power of Time

For long-term investors, the power of time is a formidable ally. Over time, the market has consistently trended upward. While there will undoubtedly be setbacks along the way, the overall trajectory is positive.

Consider this: If you had invested $10,000 in the S&P 500 index ten years ago, your investment would have grown significantly, almost doubling, despite the market’s ups and downs. This is the beauty of compound interest.

Avoid Emotional Decision Making

Now is the time to sit on your hands. Fear and greed are powerful emotions that can lead to poor investment decisions. When the market is falling, it’s easy to panic and sell your investments. However, this is often the worst thing you can do. By selling low, you lock in your losses.

On the other hand, when the market is soaring, it’s tempting to chase after hot stocks. But chasing returns is risky. Stay disciplined and stick to your investment plan.

Automation and technology make it easy. Set yourself up for success - start with a regular contribution to your investment account, one you feel comfortable with. Set it for an auto-investment every week, month - whichever you prefer, and don’t deviate from it.

This helps remove emotion from your investments - often the best thing you can do.

While the recent sell-off is concerning, it’s essential to maintain perspective. Fluctuations are a normal part of the investment landscape. By understanding this, sticking to your financial plan, and avoiding emotional decision-making, you can increase your chances of long-term success.

Investing is a marathon, not a sprint. Focus on the long term, and don’t let short-term market fluctuations derail your financial goals.

And since the world is not ending, you have time to start setting those goals.

Save On,

Chris

Disclaimer: This article provides general information and should not be considered financial advice. It’s essential to consult with a financial advisor to determine the best investment strategy for your individual needs.