Market volatility has once again reared its ugly head as predictions of doom and gloom have become the latest sensation to overshadow the US recovery. Between the recent market volatility and all of the headline news, some people are wondering if they should cash in their stocks and seek safer alternatives.
First, understand that the sell-off is due to lack of confidence and investor uncertainty, not declining fundamentals. Even though our markets are getting dragged down by global drama, the US economy is doing well. Companies reporting earnings that exceed expectations are above the long-term average, and economic growth has accelerated substantially since the first quarter. US employment plus consumer and capital spending remain largely on track, while housing and auto numbers continue to show additional improvement. All of these points are positive for the economy and the market, and reason for continued faith in equities going forward.
It is easy to get caught up in all of the noise, but it is times like these, when the market is down, that it is most important to stay invested. Those with long time horizons are significantly damaging their long-term saving potential when they sell their stock when the market dips. Research shows that if you miss just a few days of the market’s biggest gains, your long-term portfolio will suffer dramatically. By selling their stocks and fleeing for “safety,” investors are locking in those losses, and now have to figure out when to get back in. The problem is, more than likely your “sign” to get back in will be the market rebounding, and by that time it’s too late – you’ve missed out on those gains and you’re left to buy back in when the stocks are at higher prices.
Instead, it is more beneficial to stay invested through the dips of the market. Think about it – if you stay fully invested as stocks temporarily decline, not only will you get to take part in the inevitable turnaround, but you will also be able to take advantage of the higher dividend yields, the proceeds of which can be reinvested in additional discounted stock, allowing you to capitalize on compounding and increase your long-term return exponentially.
Warren Buffet offered this analogy in his 1997 letter to shareholders: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, […] if you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
If you have a long-term philosophy, a down market is nothing but beneficial, and an opportunity to add to your portfolio by purchasing high quality investments at a discount. There will be continued volatility in the markets, but volatility can be a friend of the investor providing opportunities to buy when everyone else is selling.
So turn off the news and tune out the noise. Sit back, take a deep breathe, and realize that the most important thing you can do for your investment portfolio is to stay invested. Instead of lowering contributions or moving away from stocks, now is the perfect time to increase retirement contributions or put some money away for a child or grandchild’s education. Take advantage of these lower prices. You will look back later and be glad you did.