06 Feb Stock Market Thoughts
Why should I stay invested in stocks when I seem to be losing more money every day?
The question is understandable given the way the market prices have fallen over the past several months. Most of us feel the pain of an investment loss twice as much as we rejoice in an investment gain. Frequent and consistent daily losses since late September make us feel like we have suffered multiple times over and make it easy to forget the multiple gains in recent years.
If we let them, emotions sabotage our investment decision-making. While not always easy, it is important to remember the difference between a period of performance and our period of investment. A day trader looks at a period of performance, has very short term investment goals, and follows the market minute by minute. Most of us, on the other hand, must focus on a period of investment. We’re investing to reach longer, multiyear goals such as retirement and financial independence. A long-term investor who follows markets too closely and reacts emotionally only hurts their returns and undermines their goals. Multiple studies show trading after market losses and buying after gains creates lowered returns than if you simply did nothing.
When our focus changes to the long term, so does the way we view the market. The U.S. market has risen in most 10-year periods and in every 20-year period in its history. But we expect the market to correct itself every so often. A decline of 10% or more reflects stock market history and is built into the long-term gains.
Back to the initial question – How should you respond to this market downturn? Stay focused on your long-term financial goals and on doing what you can, especially saving more, to meet them. Do your best to stick to the investment plan we worked out together. The difference between nominal price decline and an actual loss is reacting emotionally and selling. It is not at all easy to do, but in the longer term you will be much better served to simply ignore shorter term price movements and stay focused on the longer term goals.
Talk to us about your concerns. Responding to your questions is a part of what we are here to do.