Three crucial lessons for weathering financial markets

Estimated read time: 5-6 minutes

The stock market offers few guarantees.

But one thing investors can count on is volatility. Volatility is the ups and downs that the stock market can bring. And although the stock market often provides a bumpy ride, zooming out shows its powerful wealth building potential ..

The trick for investors is to figure out how to weather the storm, allowing them to stay invested for the long haul.

Dimensional Fund Advisors recently released three crucial lessons for weathering the stock market’s storm — an insightful look into practical steps you can take to navigate a turbulent market.

Dimensional is a private investment firm based out of Austin, Texas. Their entire investment philosophy comes down to one core tenet:

‘An enduring belief in the power of markets.’

At TrueNorth Wealth, we often use Dimensional Funds for our clients because we also have an enduring belief in the power of markets. We believe that for our clients to reach their investment goals, they need to capture market returns, staying invested for the long haul.

But, we understand staying invested can be difficult during market volatility. So we want to share the three crucial lessons with you.

Three crucial lessons for weathering the stock market’s storm

1. ‘A recession is not a reason to sell.’

Unfortunately, many investors make the mistake of letting their emotions lead them to follow the herd.

As stock prices increase, more investors pile in, chasing easy money and significant returns. Then, as stock prices plunge, investors retreat to the sidelines, selling on the way down and locking in losses. This is the opposite of what investors actually want.

Wise investors prefer to buy when prices are low and sell when prices are high.

Markets and the economy are separate but very related. Sometimes, markets can do even do well throughout periods of economic recession. Regardless of current market conditions, the need for an intelligent investment strategy remains. Those strategies must be prepared to encounter market turbulence on the path to building and securing wealth. For long-term investors, your mission should always be to buy low and sell high.

Dimensional offers two interesting points to consider that relate to this mission:

  1. “Markets tend to fall in advance of recessions and start climbing earlier than the economy does.”
  2. “Over the past century, US stocks have averaged positive returns over one-year, three-year, and five-year periods following a steep decline.”

Put another way — you can not capture the benefits of a market recovery if you sell after a market downturn. And often, recessions and downturns are followed by a period of positive stock market returns. So, unless you can get lucky with the timing, selling during a downturn will likely be counterproductive to achieving your long-term financial and investment goals.

Next, let’s discuss market timing.

2. ‘Time the market at your own peril.’

It’s not about timing the market; it’s about time in the market.

If you perfectly knew the future you could sell all of your investments at the market peak, hold cash during the steep decline and then buy back in at rock-bottom prices. Unfortunately, it’s just not possible. The market is unpredictable — big returns can come out of nowhere, and missing those big return days can cost you.

For example, a recent Forbes article showed that in the last 40 years, the best 10 days (out of more than 10,000) accounted for almost two-thirds of the total stock market return for the entire period.

And the trouble is, nobody knows when the best days will happen.

But, as Dimensional explains, “You might think,” I’ll sit out until things get a bit better. “But by the time markets are less volatile, you’ll have often missed part of the recovery.

The only guarantee you’ll capture the big return days is to stay invested and avoid market timing.

3. ‘It may be a good time to reassess your portfolio and your plan.’

Lastly, periods of market volatility can be an excellent time to reassess your portfolio and plan for several reasons.

First, downturns often follow periods of high returns. And often, during periods of high returns, investors find themselves dabbling in various assets. Recently for many, that meant purchasing digital assets like Bitcoin or Ethereum. For others, it meant buying Zoom, Tesla or other individual stocks to capture their big pandemic run.

But when markets sink, investors are wise to reassess and ask themselves:

  • Why is my money invested the way it is?
  • Was I following a fad, or are these investments in line with my long-term goals?
  • Was I in a portfolio that represented my actual risk tolerance?

By answering these questions, investors can get a better sense of whether they should make changes or not.

Because declining markets are not a reason to sell — you should only hold / participate in investments that align with your ultimate goals. If they do not, we suggest you evaluate your investment philosophy.

TrueNorth Wealth is here to help.

If you’re interested in working with a fiduciary CFP® professional to help outline your unique investment plan, complete with a custom investment portfolio to deliver your financial goals, then TrueNorth Wealth is here to help. Here are some of the questions we review with our clients:

What is your exposure?

How have your holdings held up over declining markets?

How diversified are you?

What are the expense ratios of your holdings?

How have your accounts performed relative to their benchmark?

How much commission are you paying?

TrueNorth Wealth is among the top Wealth Management firms in Utah and Idaho, with offices in Salt Lake City, Logan, St. George, and Boise. At TrueNorth Wealth, we focus on helping our clients build long-term wealth while maximizing the enjoyment they receive from their money. We do this by pairing our clients with a dedicated CFP® professional backed by an incredible team.

For our team at TrueNorth, it’s about so much more than money. It’s about serving families all across Utah and helping them achieve freedom and flexibility in their lives. To learn more or schedule a no-cost consultation, visit our website at TrueNorth Wealth or call (801) 316-1875

Sam Watkins, CIO, CFP®, TrueNorth Wealth

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