We believe a long-term investment philosophy is key to creating and preserving wealth. While many investors claim to be “long-term” oriented, many of these self-proclaimed long-term investors act as anything but when things get tough. After all, it’s human nature to doubt ourselves; especially when things don’t go as smoothly as anticipated. Endless warnings from market timers and online ads disguised as articles touting the next depression certainly don’t help. Even though a two percent decline in the market during a single day may not seem significant in the grand scheme of things, stomachs may churn when account values decline. Also, when markets make new highs, many investors become complacent about the risk of loss.
In some cases, these same investors become even more eager to pay even higher prices, regardless of any increased risks of loss. With all the financial noise and market turmoil, it may seem more challenging than ever to be a true “long-term” investor. In Part I of our two-part post, “Long-Term Investment Truths,” we examine three behavioral characteristics of long-term investing that can help you stick with your long-term investment strategy through thick and thin.
Long-Term Investment Truths:
Tune Out the “Noise”
News outlets take the temperature of global markets five days a week (and even on the weekends), and numerous indicators published by the government detail the health of the economy each month. The longer you invest, the more you learn to ride through the turbulence caused by all the breaking news alerts and short-term statistical variations. It is important to understand that financial media (print, TV, online) is advertising-supported media, and to “pay” for the advertising, most of the content is designed to get you to act – to buy a financial product, which is good for the companies advertising, but not necessarily you, or your long-term financial security.
Regardless of how their stock prices perform over the short term, Warren Buffett focuses on investing in companies with underlying businesses expected to perform well over the long term. In especially bullish times, his returns have sometimes lagged the market, but chasing the market is not his objective. In contrast with Buffet’s patient and long-term approach, investors who care too much about day-to-day market behavior may practice market timing, which is as much hope as strategy.1
Volatility (sometimes referred to as market risk or standard deviation) is measured by how much the market has moved up or down over a short time period, such as during a day, a week, a month, or even a year.
If history is any guide, investors in the stock market should always remember that prices can swing up or down over 20% in any given year. A $1 million portfolio of stocks or stock mutual funds can quickly decline to $800,000 or less in any given year. Some investors dislike putting up with such large swings in value, which are often unpredictable, like earthquakes in nature.2
Regardless of the investment approach, time teaches you how quickly the markets can rebound from downturns and why you should probably stay invested even through systemic shocks. Pursuing your long-term financial objectives and quality of life may depend on being patient and staying the course during difficult times in the market.
While reviewing the three characteristics above can help you stay the course for the long term, we can help you assess your comfort level with volatility and give you valuable feedback regarding your investor personality.
1 – usatoday.com/story/money/personalfinance/2016/01/30/3-reasons-you-shouldnt-worry-stock-market-2016/79304046/ [11/9/16]
2 – fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088 [6/4/15]
About The Goff Financial Group: As a fully independent Registered Investment Advisor, the Goff Financial Group is not owned or controlled by any bank, brokerage firm, mutual fund company or any other company. The company does not receive any fees or commissions from any financial products and works solely for its clients on a fee-only basis. Disclaimer: This material was prepared using third party resources, and does not necessarily represent the current views of The Goff Financial Group which are subject to change without notice. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering tax or legal advice. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as financial, investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This document is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.