What To Do When The Market is Unpredictable

It’s easy to get caught up in the distraction of short-term market performance. I keep a running list of quotes from famous investors and authors that I use for encouragement when it seems like all the news is bad news. Here are some reminders to help get you through this tough time.

“In a well-diversified portfolio, only people can create permanent losses.” -Nick Murray

The value of your investments will fluctuate daily. Though we say things like “the market lost 5% today,” you’ve not actually lost that money. How do you create a permanent loss of 5%? By panic selling and locking in that loss.

The first part of Murray’s quote— “in a well-diversified portfolio”—means that you aren’t concentrated in only a few stocks. Companies can go out of business, thereby making your investment worth nothing.  As long as you are broadly diversified, you’ve minimized this risk.

“Dieting and investing are both simple, but neither is easy.” –William Bernstein

We know we need to exercise, eat healthy, and get plenty of sleep. Easier said than done! Likewise, investing isn’t overly hard, but sticking to an investment plan when you see your account balance dropping can be difficult.

“The problem is that we tend to think of ‘risk’ as a fixed concept—that is, stocks are riskier than cash and bonds…period. But risk can only be accurately assessed in combination with a time horizon.” -Patrick O’Shaughnessy

The real risk is not your account value going down in the short-term. The real risk is not saving enough to hit your financial goals. Think about retirement. If you invest in “safe” assets like bonds, CD’s, or savings accounts, will your purchasing power keep up with inflation? Absolutely not. If you invest in “risky” assets like stocks, you will exceed inflation and are more likely to hit your financial goals.

If you think about risk this way (in combination with a long-term time horizon), which is riskier? Over a long period of time, bonds are riskier than stocks.

“You make more money selling advice than following it. It’s one of the things we count on in the magazine business—along with the short memory of our readers.” –Steve Forbes

One of the worst things you can do is to watch, listen to, or read financial news. They sensationalize everything and cater to traders, not long-term investors.

“Every past decline looks like an opportunity; every future decline looks like a risk.” –Morgan Housel

How many times have you looked at a chart of historical stock market performance and thought, “If only I invested at the bottom!” With the benefit of hindsight, we see those deep declines as opportunities to buy. However, when experiencing it in real-time, we think the world is ending.

“The stock market is a device for transferring money from the impatient to the patient.” -Warren Buffett

If you panic sell your stocks, you have to remember there’s a buyer on the other end. Successful long-term investors are patient, able to weather the storms because their eyes are fixed on the prize of building wealth.

“I spend about half of my time wondering why I have so much in stocks and about half wondering why I have so little.” -Jack Bogle

When the market is going up, you wish you had more money in stocks. When the market is going down, you wish you were more conservative. The key is to know what kind of investor you are and to be invested according to your risk tolerance.

The best thing you can do in times like this is turn off the TV, stop looking at your investments, and stick to your financial plan.