The news channels, tabloids and internet have exploded with articles and advice on what actions investors should consider in view of the stalled budget negotiations in Washington and the resulting government shutdown which started October 1. Here are some of the discussions we've had with clients, all framed in the context that having a financial plan is a road map you stick with through market highs and lows.
Just Some perspective: There have been 17 government shutdowns, the most recent in 1996.
The overall effect on the market has not been terribly negative: stocks dropped during nine of those shutdowns and rose during the other eight. Once the shutdowns ended, the market gained an average of 2.5% over the following three months and 13.3% over the next 12 months.
The moral of the story is that there will be unpredictable volatility. But don't overreact and sell out. Because once you do, at what point will it be time to buy back into the market? Most often times, investors will lock in losses and never see the gains they could have enjoyed, had they stayed put.
If You are Really Nervous, Review Your Financial Plan
If you use a financial planner he/she should be able to coach you to stick with your game plan and maintain the asset allocation you established to meet your long term goals. Remember those average Dalbar investors, who tend to under-perform the market by half, because they buy high and panic sell low? They usually have no financial game plan in place. So market volatility easily causes them to panic and to sabotage their long term investment returns.
No One Can Predict What Will Happen in the Future
So, don't try outsmarting the market by jumping in and out ahead of any news or event. This is simply a bad, bad idea.
A Well-Developed Plan will let You Sleep at Night
A good financial plan takes into account the appropriate risk and investments you'll need to reach your goals. If you are approaching or in retirement, your plan should have the necessary liquidity and short term investments which will provide living expenses for a period of time. We typically look at a providing a liquidity cushion of five to seven years. This allows us to invest other monies in a higher percentage of equities which in turn provides greater investment growth opportunities to outpace the effects of inflation.
The moral of the story here is that people who know their living costs are covered for five to seven years in liquid investments very rarely worry about short term volatility in the market.
What's the Best Time to Invest? How About Now.
Pundits will argue over the best time invest in the market. You'll find a dizzying assortment of opinions: €Don't invest now because the market is overvalued€, or €Invest now because the market is undervalued€; or €Just invest in these sectors because they are ready to explode and make you rich€. Does all this sound familiar?
But we believe, so long as you have your living expenses covered, and you are able to invest longer term with an appropriate asset allocation, the best time to invest can be at any time, regardless of where the markets may be.
This video http://www.YouTube.com/watch?v=YVpnx8BbohY&feature=youtu.be was brought to my attention by one of my colleagues in the ACA. It shows how the power of American resiliency, ingenuity and capitalism builds investor wealth over time. Granted, not many of us could have invested in 1927. But it does highlight why you should be a long term investor. As you watch the video, notice how the recessions we've gone through in the past€"which were pretty painful at the time€"appear as smallish blips in the timeline. Companies will continue to innovate and create wealth for their shareholders. This is why being consistently invested in the stock market builds your wealth over time.
Just Some perspective: There have been 17 government shutdowns, the most recent in 1996.
The overall effect on the market has not been terribly negative: stocks dropped during nine of those shutdowns and rose during the other eight. Once the shutdowns ended, the market gained an average of 2.5% over the following three months and 13.3% over the next 12 months.
The moral of the story is that there will be unpredictable volatility. But don't overreact and sell out. Because once you do, at what point will it be time to buy back into the market? Most often times, investors will lock in losses and never see the gains they could have enjoyed, had they stayed put.
If You are Really Nervous, Review Your Financial Plan
If you use a financial planner he/she should be able to coach you to stick with your game plan and maintain the asset allocation you established to meet your long term goals. Remember those average Dalbar investors, who tend to under-perform the market by half, because they buy high and panic sell low? They usually have no financial game plan in place. So market volatility easily causes them to panic and to sabotage their long term investment returns.
No One Can Predict What Will Happen in the Future
So, don't try outsmarting the market by jumping in and out ahead of any news or event. This is simply a bad, bad idea.
A Well-Developed Plan will let You Sleep at Night
A good financial plan takes into account the appropriate risk and investments you'll need to reach your goals. If you are approaching or in retirement, your plan should have the necessary liquidity and short term investments which will provide living expenses for a period of time. We typically look at a providing a liquidity cushion of five to seven years. This allows us to invest other monies in a higher percentage of equities which in turn provides greater investment growth opportunities to outpace the effects of inflation.
The moral of the story here is that people who know their living costs are covered for five to seven years in liquid investments very rarely worry about short term volatility in the market.
What's the Best Time to Invest? How About Now.
Pundits will argue over the best time invest in the market. You'll find a dizzying assortment of opinions: €Don't invest now because the market is overvalued€, or €Invest now because the market is undervalued€; or €Just invest in these sectors because they are ready to explode and make you rich€. Does all this sound familiar?
But we believe, so long as you have your living expenses covered, and you are able to invest longer term with an appropriate asset allocation, the best time to invest can be at any time, regardless of where the markets may be.
This video http://www.YouTube.com/watch?v=YVpnx8BbohY&feature=youtu.be was brought to my attention by one of my colleagues in the ACA. It shows how the power of American resiliency, ingenuity and capitalism builds investor wealth over time. Granted, not many of us could have invested in 1927. But it does highlight why you should be a long term investor. As you watch the video, notice how the recessions we've gone through in the past€"which were pretty painful at the time€"appear as smallish blips in the timeline. Companies will continue to innovate and create wealth for their shareholders. This is why being consistently invested in the stock market builds your wealth over time.
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