This post was originally published on Beyond Your Hammock.
We’ve enjoyed a bull market for the last 8 years. In the last year alone, we’ve seen the S&P 500 rise 15% percent.
For at least the last 4 years, you’ve also probably heard people — in the media, on TV, in your office — talk about how a downturn is inevitable and will happen soon.
Yet the stock market only continues to go up and up and up.
This is a good indication that asking “when will the stock market drop?” isn’t the right question. We know that we’ll experience a market downturn again.
But no one can reliably predict exactly when that will happen.
Timing the Market Relies on Speculation, Not Certainties
It’s only natural to feel a little nervous about what the stock market may or may not do in the coming months. But that doesn’t mean you need to give in to emotions and react based on those feelings.
Here’s what you need to know: there is absolutely no way to predict what the market will do next. Anyone who thinks they can do it is speculating.
And just like with gambling, sometimes they’ll be right and sometimes they’ll be wrong.
These speculators believe they can time the market. The problem with timing the market is that it can set you up to make an all too common mistake that can sabotage your efforts to build wealth: buying high and selling low.
How Your Own Irrational Decision-Making Creates More Havoc Than Market Volatility
So why does marketing timing, speculation, and acting on emotions lead to buying high and selling low?
It doesn’t every time — but if you consistently react this way, you’ll perform worse on average than if you stuck to a rational, objective, long-term investment plan.
Here’s how it tends to play out for the average investor who lets their gut take the wheel:
- Average Investor puts money in the market.
- For a while, Average Investor may watch their portfolio perform well. Prices go up and things are in the green!
- At this point, they feel confident and assured. Average Investor is perfectly happy to continue buying. It’s easy to put more money into a market that just keeps going up.
- Eventually, the market experiences a downturn. Average Investor starts seeing red and gets nervous. The numbers sink lower, and lower, and lower.. which hurts! It feels like a loss (and humans are hardwired to avoid loss even more than we’re motivated to experience a gain).
- Average Investor gets emotional — panicky, nervous, uncertain, afraid — and sells at a low price to get out of a sinking market.
- Average Investor’s losses sting, and they don’t put money into the market until it starts rising again. When they eventually start buying, prices have risen well above the market bottom.. meaning they’re paying much higher prices to buy back in than what they sold for to get out initially.
The average person buys high and sells low because they react emotionally, not rationally.
Timing the Market Isn’t Necessary When You Rely on a Long-Term Investment Strategy
With a properly constructed portfolio built specifically for your risk tolerance and time horizon, there is no reason to panic when the stock market drops.
“Losses” are not realized until you sell.
If you sell when prices are low, there’s no chance for those unrealized losses to swing back to unrealized gains when the market trends upward once more.
Growing Your Wealth Means Investing Objectively Over Time
There’s a reason I work together with my clients to create a comprehensive financial plan that goes far beyond investments.
We look at a comprehensive financial plan in order to:
- Strategize how to allocate financial resources to enjoy life today while still planning for the future.
- Develop action plans to achieve short term goals today, in the next 12 months and 5 years down the road, and also long term goals 10 or more years into the future.
- Make rational decisions about how to invest for short-term goals and long-term needs (like retirement).
- Understand all your options so you can choose how you want to use your money — because the most important thing is using your resources in a way that allows you to create the life you really want to live.
The money we put in the market is money clients aren’t looking to use in the next several years. They know they can take advantage of time.
When a market downturn happens — as we know it will, we just don’t know precisely when — they can retain peace of mind around their finances.
They understand that, at a minimum, their investments can stay put for at least 5 years (but more likely, they’ll stay invested for 10, 20, or even 30 years).
That’s an abundance of time to ride out the market and enjoy the benefits of dollar cost averaging.
Growing wealth is a long-term process. Over decades of saving and investing, you will see the market swing back and forth.
It’s how we react to those swings that makes all the difference.
Plan for Bull and Bear Markets So You Can Stay Invested Through Both
No one — not your coworkers, not the media, and not even your advisor — knows for sure what the market will do next.
But what I do know is that the market will go up, and it will go down.
This is why I work together with my clients and help them plan for those ups and downs. I create investment portfolios that are well positioned to take advantage of long-term stock market growth.
That means we also need to buckle down and ride out the volatility that is inevitable over the short term.
I know watching the market jump around or listening to talking heads saying a correction is certain to happen soon can make anyone feel nervous or worried.
I get it because I have those same emotions.
And when those come up for me, I look to my financial plan. I consider the fact that the money I invest is money I want to use 5, 10, or even 20 or more years into the future.
Market fluctuations, and my feelings that go along with them, are going to be completely irrelevant in a decade.
The anxiety and stress may still be there. No one likes seeing the market take a tumble.
But I remind myself that no one can reliably predict or time the market to avoid the downward swings.
I also remind myself I’m investing for the long haul — and you should be, too.
Is it time to get your own financial plan to help you create the life you want? Reach out and claim your free 30-minute strategy session.