Stay Cool, Calm and Collected When Investing

5 steps to help you stay that way even when market returns are disappointing

Senior couple bike riding: Stay cool, calm and collected when investing

How do you feel when your investment account performs below your expectations? What should you do?

Those are appropriate questions, as the first eight months of this year were not very profitable.

Nearly every major asset class — including U.S. stocks, foreign stocks, bonds, gold and oil — produced low, flat or negative returns through the end of August.

Even if the stock and bond markets are back on the rise by the time you read this, what happened provides a valuable lesson on what you as an investor should do to get through a period like this.

There are five basic steps you need to take.

First, let’s examine why the markets are occasionally stagnant like they were during the first half of 2015.

To understand, picture yourself at a four-way stop. Off to your right, you hear a siren, telling you that an emergency vehicle is approaching.

To your left, someone using a cane is starting to cross the street slowly. And directly across from you, two children are playing with a ball.

You sense that the ball will soon bounce into the street, and the kids will run after it.

What will you do?

If you’re a responsible, careful driver, you’ll wait until the ambulance passes, the pedestrian has crossed the street and the kids’ parents have called them back into their yard.

Yes, you wait — until all the risks and distractions have ended before you proceed safely toward your destination.

Well, that’s exactly what the stock and bond markets did during the first half of 2015 and were still doing at the time of this writing.

They waited — to see how financial uncertainties in some countries (most recently Greece, China and Puerto Rico) would play out.

Some of those situations calmed down, and new headlines took their place — such as the U.S. agreement with Iran on nuclear development, shootings of military personnel in the U.S., more Internet hack attacks, the election campaign and natural disasters. Yet despite news that’s often scary, U.S. stock prices remained essentially at the same level after six months as at the start of this year — reflecting the strength of the U.S. economy.

If this feels like déjà vu, it should — because as I mentioned we’ve experienced this before. There was 2004, for example. The S&P 500 stood at 1,120 on Jan. 1 of that year. It was the same on Feb. 4, March 18, April 21, May 27, July 7, Aug. 7, Oct. 8 and Nov. 1. Yes, for the first 42 weeks of 2004, the market was essentially flat and investors naturally were disappointed.

But during the last 10 weeks of 2004, the market jumped 11%! 

And that was not the only time the market has behaved that way. In fact, it happens fairly often. In 2014, for instance, 75% of the market’s gains  occurred in the last 11 weeks of the year. In 2010, the Dow was down 7% on June 30 but ended the year up 23%. There were similar scenarios in 2005, 1999, 1998 and 1982.

Yes, it is quite common for the market to be sluggish for a large part of any given year and still post a fine result by year’s end.

Will that happen this year? No one can say. And because it’s impossible to predict how the markets will perform by the end of this year or any other year, here are the five steps you must take to get you through flat markets and other periods of uncertainty without needless anxiety:

1. Make sure your portfolio is properly diversified and stays that way. Don’t concentrate your investments in just one or two asset classes — or you run the risk of owning the wrong ones.

2. Maintain a long-term investment perspective. The only way to be certain that you’ll capture all of the market returns when they come is to be fully invested in all of them throughout the entire year. This is not the time to lose faith in your portfolio. Instead, whenever prices are flat or falling, you’ll want to buy.

3. Don’t focus on the current performance of your portfolio. Some investors fret that their investments haven’t risen in months — or even dropped a bit. The solution is simply not to look at your account frequently. Looking too often can trigger negative emotions, causing you to want to sell low and later buy high. If you insist on looking at your statements often, then look at market averages too. Seeing that your portfolio’s performance is consistent with the overall markets’ will help you maintain a long-term focus. And instead of looking at the returns for only six months, look at the past six years or the past 16 or even 26 years and project where you might be in the next six, 16 or 26 years. Remember: Patience is one of the most valuable investment strategies. If you’re going to micromanage your account, telling yourself that you will never tolerate losses of any kind, you should not be invested in the financial markets at all. Your money should be sitting in bank CDs or U.S. T-bills.

4. Make sure you add to your accounts regularly. Doing this while prices are stagnant or declining buys you more shares and helps improve your future wealth!

5. If you’re retired, manage your withdrawals effectively. This is especially important if you are dependent on income from your portfolio. 

Perhaps you’re saying that, while these five strategies make sense to you, you’re confused or uncertain about how to implement some of them. You’re not sure whether your portfolio is properly diversified, for example. 

If that’s the case, we’re happy to help. If you have questions about your investments or your current strategy — or any issue about personal finance — just visit us online, give us a call or visit one of our offices at any time. 

Originally published in Inside Personal Finance October 2015

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