Most investors may be surprised to hear that the market has dropped 20% every three-and-a-half years or so. That’s based on the unmanaged Dow Jones Industrial Average dating back to 1900.
Having that historical context can strengthen your resolve to stay invested, which can be key to long-term success. After all, pulling out of the market at a high point and buying back in at the bottom is almost impossible to do once, let alone a number of times during your life as an investor.
A survey by financial research firm Dalbar determined that over the 20 years ended December 31, 2017, the average stock investor’s return trailed that of the broader market as measured by the Standard & Poor’s 500 Composite Index by nearly 2% per year. Put another way, while the market gained about 7.2% annually, the average investor’s portfolio realized only a 5.3% yearly gain. Much of this difference can be attributed to the fact that many investors sold near the bottom of the market and stayed on the sidelines — missing some of the market’s best days. Market turnarounds often happen suddenly and unpredictably. Being out of the market when it bounces back can rob investors of significant return potential over extended periods.
Investing during a downturn may go against your instincts. However, stock and bond funds have been a good way to meet long-term financial objectives, and purchasing shares during a decline is like buying investments at bargain prices. As markets become less emotionally driven, stocks and bonds generally return to something closer to their average, so investors who “buy on the dip” can benefit.
While regular investing doesn’t ensure you’ll make money, staying the course through market fluctuations and buying additional shares at lower prices when the opportunity presents itself can increase your portfolio’s ability to provide income.
It’s no surprise that our mood drops when the market does. While we recognize that market declines are a reality, we are still susceptible to letting the feelings that accompany those downturns drive decisions that aren’t in our best interest.
According to behavioral economist Dan Ariely in his book, “Predictably Irrational,” it’s important to understand the power that emotions can exert over our choices. Knowing that we are prone to making poor decisions when gripped by intense emotion may help prevent us from doing so. In other words, keep calm and stay invested.
In an age of constant connectivity, tuning out financial news can be tough. But fixating on daily or even weekly market returns can lead to rash decisions that ultimately impede our long-term success.
One strategy for curbing the emotional impact of market volatility is to review the value of your investments only at regularly scheduled times. Many investors do so quarterly, when they receive account or brokerage statements. Focusing on the long term makes you less likely to make constant changes in response to day-to-day market swings.
You wouldn’t set out on a Himalayan trek without enlisting a guide who understands how to navigate the most perilous stretches. The same is true of investing.
Your financial professional can be a steadying presence when markets are on a rollercoaster. Maintaining open lines of communication can prevent you from taking steps that could throw you off track and undermine your investment goals. Talk to your advisor about creating a financial plan that can weather various market conditions.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Dow Jones Industrial Average is a price-weighted average of 30 actively traded industrial and service-oriented blue chip stocks.
Standard & Poor's 500 Composite Index is a market capitalization-weighted index based on the average weighted results of approximately 500 widely held common stocks.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.