By Steve Doster
Daily swings of the Standard & Poor’s 500 (abbreviated as the S&P 500 and what most refer to as “the market”) have been excessively large the past couple of months. These swings occur throughout the trading day. There is no way to predict or time the stock market. Holding tight during these storms is the best strategy for a long-term investor.
As an example, there was one day in December when the S&P 500 index was down about 1 percent during morning trading. Despite the rough start, however, the S&P 500 index finished the day with a small gain. A 1 percent change translates to about $300 billion of fluctuating value for 500 of the largest U.S. companies.
Let that number sink in. The trading day lasts for 6 1/2 hours. A $300 billion swing is about the size of Columbia’s annual gross domestic product. These 500 companies still own the same buildings, sell the same products (to the same customers), have the same supply chains, and are run by the same people. Investors couldn’t decide how much these 500 companies were worth that day even though nothing changed with the companies themselves. It is impossible to predict what information the market is digesting and how it will impact stock prices.
Following the market’s short-term moves can be very misleading and detrimental to investors. Most investors tend to sell when the market drops and buy back in when stocks get hot again. It would be nice to be able to sell right before a downturn and buy back right before an increase. The problem with this market timing strategy is that an investor needs to be correct twice. Research shows this is impossible to do over long periods. A better way is to invest in a diversified portfolio and stay the course.
A diversified portfolio is one that includes stocks, bonds, and real estate. These different investments work together to keep your money safer during downturns. A portfolio of 100 percent stocks will be about as volatile as the current S&P 500 index. However, a diversified portfolio of stocks, bonds, and real estate will remain more stable throughout these uncertain times. Having more stability in your portfolio allows you to feel calmer and stick with your investments while the storm passes.
Systematic rebalancing is another way to stay the course during volatile times. As stocks and bonds increase or decrease in value, one asset class can be sold, and another purchased to keep your investments in balance. When this is done correctly, investors will automatically sell high and buy low. You will sell something that has grown so much, you end up with too much of it. That money is reinvested in something that has gone down in value and you need to buy more to get back to the target amount.
When markets get bumpy, as they have been the last couple of weeks, rely on a diversified portfolio of stocks, bonds, and real estate to get you through the storms. Attempting to time the market by getting out of stocks with a plan to get back in at some point in the future is a losing proposition. Choose a mix of investments that allow you to sleep at night. Check on it every so often to make sure things are still in balance. Then ignore everything else. It’s all noise from a storm that will pass.
—Steve Doster, CFP, is the financial planning manager at Rowling & Associates – a fee-only wealth management firm in Mission Valley helping individuals create a worry-free financial life. Rowling & Associates helps people with their taxes, investments, and retirement planning. Read more articles at rowling.com/blog.