Broker Check

Expert's Advice to Jittery Investors: Stay the Course Despite Stock Market Volatility

By Howard Hook, CFP®, CPA
First appeared in the New York Daily News "Daily Views" Column
January 22, 2016

Since 1970, there have been two periods of time that have yielded positive returns for the S&P 500 for eight consecutive years.

Currently the S&P 500 (including reinvested dividends) has yielded positive returns for seven years. And, while it currently seems unlikely that this current streak will continue, the year is young and there is still plenty of time left. Even Joe DiMaggio had a few late inning hits to keep his 56-game hitting streak alive in 1941.

Conversely, the longest streak of consecutive negative years is three, which has happened only one time since 1970.

Three lengthy streaks of positive stock market returns over the past 46 years is pretty remarkable and should give long-term investors comfort that markets tend to move up and generally do so for stretches at a time.

However, one of the downsides to prolonged periods of market positive returns is that investors tend to forget that markets actually go down. After a while, investors tend to think that the market will continue to go up (straight up) each year.

This most recent streak of positive returns created just such an illusion for investors. Additionally, investors still remember the Great Recession of 2008, which directly preceded the past seven positive years.

A 50% drop in the market that year followed by seven strong years of market returns is probably enough to make most investors' heads spin now that the market has pulled back.

The realization that the market can really spiral down is quickly followed with the thought that this is 2008 all over again and that the markets are headed for another 50% drop. This becomes a self-fulfilling prophecy for some investors who, threatened with this possibility, sell their stocks, locking in a loss and then wondering at what point, if at all, they should get back into the market.

As advisers we try to help our clients deal with this by reassuring them that indeed markets go up and down all the time, that you only lose money if you sell out of the market, and that trying to time the markets is difficult if not impossible to do.

You need to stay the course, we say — the same advice we gave to investors back in 2008.

In reality, an empathetic adviser who understands and listens to your concerns is what most investors need. Realizing that these two competing thoughts are in your head — neither of which is likely to go away anytime soon — is the first step to dealing with the current volatility and allowing you to avoid making a big mistake.

The fact that markets go up and down doesn't make you feel any better. Dwelling on the perils of trying to time the market won't do much either for you. Hoping to calm you down by reciting market statistics when all you want to do is sell all your stocks only creates more anxiety, and has you questioning whether your adviser really listens to you.

Instead, start thinking about how the current market volatility will impact your future goals. Reviewing your cash needs from your portfolio and confirming that you won't need to sell an investment to provide for those needs can make you feel better that your lifestyle will not be impacted by the current market volatility.

Finally, selling a small portion of your stock portfolio (tax loss selling comes to mind) with a commitment to re-enter the market at a specific later date can also take some of the edge off when you feel like you must do something and can't simply stand around and watch the value of your investments decline.