Most people use the stock market for long-term goals. That's why it's critical to keep a wide perspective when daily stock market fluctuations dominate the headlines.
The stock market is an outlet for many investors to seek potential growth for their retirement funds and other long-term goals. Many of us know that growth in the market does not come in a linear fashion. Instead, the potential growth in the stock market can come in many different forms… some years of slow and steady growth or slow and steady losses, some years of huge positive and negative valuation swings, etc. Psychologically, this can come with many challenges. I have seen many different statistics in behavioral finance studies, but simply speaking, the majority of investors feel the pain, so to speak, of a loss of money more than the enjoyment of the gain of the same amount of money. The media preys on this. Fear drives ratings. Turn the day-to-day banter in the media off and tune them out… they do not know your plan. Short-term events do not dictate your long-term outcome. For long-term investors, the psychological feeling should be quite the opposite in my opinion if you add a few layers of thinking to these swings.
A good rule of thumb for investors in general is they should have their short-term money nowhere near the stock market (or any investment vehicle with high risk for that matter) in growth portfolios and their long-term money (lets define this as 10+ years) almost all in a growth portfolio if their risk tolerance allows. This strategy may offer you a better chance that your standard of living or financial strategy will be affected by a drop in the market or a string of a few down years. One should always have a short- and long-term strategy with their money and not one risk tolerance for all dollars needed in different time horizons if you seek to have your wealth optimized. A good reminder is there is a BIG difference between volatility and loss. Your funds will experience volatility on a day-to-day basis — this is what we are signing up for when entering the stock market. BUT – you only experience loss when you SELL out of a position or leave the market. If you do not need the money in the short-term, there is likely not a good excuse for exiting / timing the market and selling. Embrace volatility and perhaps avoid loss.
If you are adding to the market on a monthly basis or ongoing basis, this is often called by a common technique named dollar cost averaging, and you are a long-term investor, you should mathematically be rooting for the market to go down. You get more bang for your buck for the dollars that you are putting in. Some of the smartest long-term investors’ most important metric that they keep track of is TOTAL shares in the funds or stocks they own NOT the dollar value of their positions in the funds. If we are in the market hoping for long-term appreciation, doesn’t it make all the sense in the world to want to have as many shares as possible for that potential long-term appreciation and upside? With this metric in mind, your strong months and years of progress as an investor therefore are when the market is taking a dip and for the same dollar amount invested, you are receiving more shares. My recommendation is for all long-term investors to keep track of how many shares they own in their respective investments in addition to the valuations.
In sum, I encourage long-term investors to mentally and emotionally remove yourself from your portfolio. Instead, consider only being in the market with money that is earmarked for a long-term time horizon and build and maintain discipline towards reminding yourself about the difference in volatility and loss. On top of this, continue to remind yourself of the potential mathematical advantage behind dollar cost averaging and the opportunities that exist to accumulate more shares in different market environments.
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated.
Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. This is not a recommendation of any strategy or product in particular. 1427303 /DOFU 3-2016
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.
Dollar Cost Averaging does not assure a profit and does not protect against loss in declining markets. Also, since such a program involves regular investment purchases regardless of fluctuating price levels of the investment, consider your financial ability to continue purchases through periods of low price levels.â€‹