Markets on Wall Street and around the world have seen dramatic swings recently. The bull market has run into a wall of alarming news - from turbulence in China to vague Federal Reserve policy, a crash in oil prices and a slowdown in earnings growth. The general outlook for 2015 is bleak, with the S&P 500 looking at its worst year since 2008.
Should we care? Absolutely not.
With a long-term investing approach, you need not worry about short-term market fluctuations. Why? Because the markets will eventually recover and exceed its current position. So don’t break a sweat. Rather focus on expanding your portfolio by buying wonderful discounted businesses when the overall markets are down.
To help you keep level-headed, I want to share with you five key pieces of advice on how to handle your investments and emotions during volatile market conditions.
Five things value investors should remember when considering investment changes during global market volatility as stated by Jason Zweig - Columnist at WSJ Intelligent Investor.
1. Don't panic
Overall stocks still aren’t cheap, but they aren’t expensive either. US stocks are trading at an average of their long-term inflation adjusted earnings putting them nearly in line with a mix of bull and bear markets over the last three decades.
2. Don't get rattled by the news
“Brace for worst year on Wall Street since 2008” – CNN Money
“Get ready for a ‘destruction of wealth’ as stocks head toward a bear market” – MarketWatch
Financial journalists sure aren’t doing you any favours are they? Even though the headlines scream at you to make drastic moves, don’t! Ignore your gut feeling and stick to your strategy. If you are holding for the long-term, you can stay confident that the stock market news will be good over time.
Sudden market drops are normal and are in most cases short-lived. For example, the last week of September, the Australian stock exchange had one of its biggest one-day losses in the past decade. And then, over the next two days, it made back all those losses. Mistaking fluctuations for something more dramatic causes you to lose sight of your long-term investing goals.
3. Don't fixate on the word "Correction"
A market correction is a temporary price decline that interrupts an uptrend in the market. It is a reverse movement of at least 10% from a recent high. Corrections are necessary to stabilise the markets and circumvent a complete market crash. However, the losses suffered by a correction usually recovers quickly as the markets recover. Don’t fixate on a correction. All you need to worry about is the market’s outlook for the future, not how far it drops in the 'here and now'.
4. Don't overreact
Can your portfolio withstand a protracted market decline? Revisit your portfolio to assure you are well diversified with plenty of cash, some bonds and a mix of global stocks. If you survived the bear market of 2007 and 2009 without selling, you would probably be able to withstand the potential further declines of this year. For some tips on how to effectively manage your portfolio, download our Asset Allocation and Effective Portfolio Management Part Two eBook.
5. Nobody has a clue
Rest assured that no one truly knows what the market will do next. Not even the professionals or gurus can confidently predict the market. Having the humility to know that you don’t know and to recognise that no one else does either, is a huge advantage to long-term investors.
It’s not how markets behave but how you respond to them that will ultimately determine your success.