Adopting a long-term strategy diminishes short-term volatility
We all know that investing typically requires a long-term approach when markets are in turmoil, as they are now, but it’s easy to lose that perspective and focus on what’s happening over the short term. It can be reassuring, though, to understand how the stock market has behaved historically.
Stocks are a poor investment and just too risky. In reality, the stock market goes through cycles of positive and negative returns. It always has and it always will. Between 1950 and 2008 there have been about 10 economic contractions that negatively impacted stock returns. However, after each negative period the market rebounded.
Increased volatility means you are better off investing in bonds.
Volatility actually diminishes over time. It’s true that short-term returns can vary greatly and investors can see significant gains or losses over the course of a few years, but looking at the long-term returns diminishes the overall volatility.
You can increase returns by getting out of stocks when things get bad, and moving back in when they start to improve. Naturally, you make money when you buy low and sell high. If you sell off your stocks after the market has already fallen, you are selling low. Once the market begins to improve again, you will be buying back in at relatively high prices. Most people can’t accurately time when to move in and out of the market and actually hurt their returns when they try to pick the right time.
So, make sure you are looking at the big picture when making investment decisions. Unless you need the money immediately, you can keep from making irrational decisions based on short-term market activity. Don’t completely ignore what’s going on with your investments; thinking long-term, however, can help you maintain your perspective and reduce your stress levels.
