Don’t Listen to the Carnival Barkers
Financial news reporters on television can often come across like carnival barkers in an attempt to get and then keep your attention. But remember, their goal is ratings, not your financial well-being. What’s a great way to keep someone’s attention? Play on emotions of fear and greed. Focusing on daily fluctuations (a stock being up or down on any given day) is not the way one should be looking at investments in their portfolio. In fact, trading on a day-to-day basis (or intraday) is speculating, not investing.
When it comes to investing, having a short-term view can be detrimental. Having at least a 5-year, and preferably 10-year or longer time horizon, has long run benefits. Here's proof:
Reduction of Risk Over Time1
On the left axis is performance, on the bottom axis are different time periods. The bars represent the range of returns. Let’s look at small caps: On the very left one can see that the volatility of one-year returns for small cap stocks is quite large. In some years, small cap stocks have doubled in value, and in some years small caps have been cut in half. Now look at the 20-year time period for small caps (third dark blue bar from left). The range is much smaller, indicating significantly less volatility. This has been the case for all of the asset classes – small caps, large caps, government bonds and T-bills.
Now take a look at the Compound Annual Return box in that same chart. Over the very long-term (1926-2020) small caps have enjoyed an average annual return of 11.9%, large caps 10.3%, and so on. What the data suggests is that it pays to stay in the market and not make too many short-term trading bets.
Let’s look at more recent history:
The above chart shows the performance of the S&P 500 over the last three years. Observe how quickly the stock market fully recovered from the initial coronavirus news. In the middle of a global pandemic, with businesses shuttered and millions of employees out of work, the stock market’s performance has been exceptional. One can easily see how poorly a panic seller in the first quarter of 2020 would have fared.
Here’s another way of looking at it. Take retirement assets. These funds are supposed to last for the rest of your life, and perhaps longer if your spouse outlives you. Unless you are withdrawing large sums early in retirement, during a down market, you should not be so concerned if your portfolio is up or down any given day, week, month or even year.
If you find yourself getting emotional about market swings, reach out to your relationship manager or other financial advisor. A professional should be able to be more objective about market conditions, and should know enough about your personal goals to be able to suggest any necessary changes to your investment strategy that will help you sleep better.
And remember that television personalities, much like carnival barkers, are selling you something in their short-term market analyses. Don’t listen to the carnival barkers. Hire a financial advisor who can see past the short-term market noise and is invested in helping you attain your goals.
2Source: S&P Global
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