It is very easy to understand the discomfort a falling stock market has on investors given the crash of 2008/2009. This volatile decline ended with an S&P 500 intraday low of 666.79 on March 6, 2009. When the market starts getting crazy, we can’t help but think back to this crash. It was painful. I speak from experience. I not only lived it myself, I lived it with our investment clients, the staff of Wealth Management, family, friends, colleagues from other firms and many of the employees of Schneider Downs. So I understand how fear rears its head quickly whenever the markets “plunge.”
Looking back at that event, we all now have the benefit of hindsight. Hindsight can be a great thing, but it can also give us a false sense of our ability to make decisions. In this case, I am referring to an individual’s ability to predict what the market is going to do next. As much as I want to believe one can correctly exit the stock market before a crash and re-enter to capture the upside, I don’t. Why?
In my opinion, there are three reasons: (1) as much as we know about what happened the last time the market sold off, the scenario never plays out the same way, (2) stock market movements can occur very quickly in both directions (2010 is a good example), and (3) the same fear that prompts investors to leave stocks when the turmoil begins often prevents them from buying back into the stock market quickly enough to benefit from the recovery. Perhaps this is why studies show that individual investors’ portfolios significantly underperform most investment asset classes over the long-term.
This does not mean that we cannot learn from the 2008/2009 experience. Hopefully, we all have a better understanding of who we are as investors, how important it is to manage our debt, and the importance of having cash on hand to handle periods of short-term turmoil.
Unfortunately, there is always uncertainty in the equity markets. Today the level of uncertainty is heightened by the depth of the recent recession and the debt problems still overlaying the global economy. But that does not mean that over time, even in a stressful environment, an investor cannot grow assets. So, what can an investor do when there is so much uncertainty and fear?
In the next few weeks, using Insights as my platform, I will expand upon the following four steps and the role that each can play in helping investors of all ages deal with the day-to-day volatility of the equity markets.
Step 1: Understand Your Financial Stage in Life
Step 2: Understand Your Cash Flow Needs
Step 3: Fill Your Investment Baskets Based upon Steps 1 and 2
Step 4: Evaluate Your Strategy Annually or Earlier if Cash Flow Needs Change
I invite you to follow along with each Insight. If you don't already subscribe, please consider registering for our free Insights newsletter. Each article from my series will be reissued in upcoming editions of Insights. You may also register to receive The Ticker, a newsletter issued by Schneider Downs Wealth Management Advisors. In the meantime, hang in there.
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