How disciplined will you be in the next downturn?

Do you remember early 2016? I sure do. The global stock market dropped approximately 15% from November 2015 to February 2016. During that time, I received several calls from clients expressing concern.  Some of these concerns are paraphrased below:

  • “I can’t handle seeing my money disappear any further.”
  • “Such a sharp drop in the market means worse times are ahead.”
  • “Don’t you think we should move to cash?”
  • “Let’s move to cash and then get back in when the market bottoms out.”

What I am about to say is eye opening: If you stayed the course and stayed invested, you would be up about 31% cumulatively from February 2016 to September 2017. The other side of the story is an investor that tried to time the market. Let’s assume he moved to cash and got back in when the market recovered in July 2016.  He/she would be up about 4%.

Research shows that the more a client tinkers with their portfolio, the worse their performance is. Several studies out there show those who react to market events had significantly worse performance than those who stayed the course.  This is called the investor behavior penalty.  How can you ensure that you won’t fall victim to market timing and irrational investing, develop a plan and stick to it.

Market drops and losses are an expected part of investing. You have to accept a degree of risk to earn a return.  One of the largest determinants of your success as an investor will relate to how well you can “stay in your seat” in times of market volatility. We have had quite a run in the stock market over the last 8-9 years. A downturn is inevitable, but we just do not know when that will be. Will you stay disciplined when it comes?

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