5 Common Misconceptions About Market Volatility and Your Investments
It’s not hard to find information these days – simply ask a question and “Alexa” will tell you what she finds out. What can be difficult, however, is finding accurate information.
This is extremely important, especially when it comes to investing and your finances. Alexa may be a wiz at finding popular information online, but she’s not a financial advisor. Typing something into a search engine may find you a popular answer, a common rule of thumb or advice that sounds correct, but this can also be dangerously over-simplified.
The Internet isn’t the only factor. When you’re unsure about something, it’s natural to turn to friends, family members or coworkers for advice. But assumptions and misconceptions can be spread this way too.
As a financial advisor in Annapolis, I see it happen a lot.
With fears about how the Coronavirus pandemic will affect the market, and therefore, your personal investments, more and more people are turning to the Internet for quick advice. But Google is not a financial advisor. And investing and financial planning is not a one-size-fits-all equation. Rules of thumb can be helpful, but it’s important to remember that they are just general theories that help guide you based on average scenarios. Is your situation cut and dry?
Let’s take a look at some common advice worth thinking twice about.
1. Follow Your Gut: Buy Low, Sell High
Buy low, sell high is a strategy where you buy investments at a low price and sell them at a higher price. Timing the market is nearly impossible and we strongly advice against this strategy.
Investing can seem easy during bull markets – it’s easy to be financial guru when things are going well. But what happen during bear markets when prices drop?
We experienced this in 2020. In the spring, spurred by Coronavirus-inspired lockdowns, the major market averages plummeted. While they regained most of their strength and made new highs during the summer and fall, the uncertainties about further economic impact of the Coronavirus have people nervous.
Here’s the truth: Stock markets are always somewhat volatile. Fluctuation in value is to be expected.
Often times this brings out the worst in investors. We see a lot of panic, and we watch many DIY investors sell (when prices are low). When the market recovers, many of these same investors want to buy back in (when prices are high). As you can see, emotions can guide you to do the exact opposite of what the rule of thumb suggests.
Emotional decisions can be quite harmful to your wealth. What’s important in these times is remembering your long-term goals. If you find this difficult, a financial advisor can help, offering outside, unbiased, educated advice. Despite their unpopularity, bear markets can actually be great opportunities for long-term investors.
2. No One Beats the Market
While overconfidence can be dangerous, so can a feeling of defeat.
“No one beats the market,” conveys that a down market will likely have a negative impact on all portfolios. But that is an over-generalization.
Financial advisors invest much of their time assessing the outlook for various sectors and types of business with the goal of finding opportunities and managing risk for their client’s portfolios. The difference here is using strategies based on education and experience rather than emotions and fear.
Working with a financial advisor can help you ensure you are taking the right amount of risk in your portfolio, you’re diversified correctly based on your profile and goals and give you an assessment of where you are today relative to your personal financial goals.
3. Gold is a Safe Harbor
Gold is widely believed to be a safe harbor against fluctuating markets. A small percentage of your portfolio in gold, the thinking goes, helps insulate you against market crashes and instability. The belief behind this is that governments may print money, but gold is a finite asset and thus is always desirable to someone.
This is one of several beliefs outmoded by time. The price of gold itself fluctuates, and thus is not always protection against volatile markets.
Discuss your asset allocation with a financial advisor who can help you determine an appropriate asset allocation.
4. Once You’re Retired, Your Portfolio Should be in Bonds
Age is not the only factor to determining your risk level. This one also stems from an earlier time. Portfolios of younger investors were divided among stocks and bonds/cash instruments so that the portfolios could benefit from the average stock price appreciation (approximately 10 percent annually, on average, over the last 90 years), while protecting against volatility with bonds. Bond and cash yields were on average lower than stocks, but neither was subject to the fluctuation of stocks. The adage goes that at retirement, the portfolio would be investing in all bonds/cash instruments, no stocks.
But it’s no longer prudent to place all your retirement portfolio in bonds. Why? For one, bond and cash instrument yields have been at historical lows over the last decade or so. Currently, at between 1 and 2 percent, meaning that they currently are not keeping up with average annual inflation. This factor alone can cause an investor to effectively lose purchasing power.
Another factor to consider is the average longevity of Americans has been steadily expanding over the past few decades. Life expectancy was once not much longer than retirement age. Current retirees, according to the Social Security Administration, can now expect retirement to stretch well into their 80s. It may not be prudent to have such a low return for that amount of time, because you may run out of money.
5. Keep Volatility and Risk to a Minimum
Generally speaking, keeping risk to a minimum is a safe rule of thumb, but again, that’s a general statement that is better suited for investors uncomfortable with stock market fluctuations. Many people lose sleep at night if they think their money is dropping in value.
Longer timeframes, high salaries, no dependents and specific goals should be evaluated when determining the right amount of risk in your portfolio.
As a financial advisor in Annapolis, I have helped many families establish a financial plan that works for them. Very rarely are two situations the exact same.
The Bottom Line
Handling your finances on your own can be complex, confusing and demanding. Seeking advice can help. Take the time to make sure you’re getting the advice that makes sense for your unique situation.
Scarborough Capital Management has been helping busy people make smarter financial decisions for more than 30 years. If you’re looking for help with your plans for the future, contact us to see how we can help you too.