There’s no doubt that market volatility can be hard on investors’ nerves.
For many of us, the highs and lows of the past couple of weeks have created a real sense of discomfort, and a feeling of not being in control.
But if we step away from the day-to-day headlines, it’s clear that we actually have more power over our long-term investment results than we might think. To understand what we mean, let’s look at the concept of risk.
When money managers talk about risk, they’re generally referring to short-term risk, or volatility. Volatility is the degree to which investments rise and fall rather than moving in a straight line.
But volatility is just one kind of risk. And for long-term investors, it is not a very consequential one—as long as you avoid impulsive decisions. Knee-jerk, emotional decisions often result in investors’ locking in losses, and they are to be avoided at all costs.
The more important risk for most investors is known as shortfall risk. Shortfall means not having enough money to retire comfortably, or even running out of money in retirement. It’s a long-term risk that absolutely requires our attention. Fortunately, by using good practices as an investor, you have the ability to effectively manage shortfall risk.
The key practices include:
- Understanding how much money you’ll need to retire comfortably. You can’t draw a map to your destination until you know what your destination is. That’s why clarifying your long-term objectives—and their cost—is such a bedrock component of investment planning.
- Saving adequately. There is no more important factor in reaching your retirement than disciplined savings; even the highest returns won’t protect you from shortfall risk if you haven’t saved enough over the years.
- Managing your investment risk appropriately. To protect your capital, it’s critical to develop a fully diversified investment portfolio in which your assets are carefully allocated to balance growth and risk. Your asset allocation is based on your personal goals, time horizon and capacity to endure volatility.
- Practicing discipline with your investments. It’s critical that you resist any urge to buy or sell investments based on short-term market movements.
We are all wired to react to feelings of fear and greed. And the more we watch the news and check in on our investments, the more likely we are to make rash decisions that we will almost invariably regret.
So do yourself a favor: Check your account balance once per quarter at most. And try to avoid obsessing over the day-to-day direction of the market.
If you’ve embraced good investment practices, your job right now is simply to stay the course. If you haven’t yet created an investment plan that will let you sleep at night, give us a call and we’ll be happy to help.
Remember: You have the power to be a successful long-term investor—even if market volatility creates a little discomfort along the way.