In October, we saw a global pullback in the stock market. This prompted a flurry of media hype that spooked many investors. Flooded with headlines touting things like “Global Growth Concerns” and “A Brewing Storm,” many investors experienced a kneejerk response to simply do something. They sold stocks, changed their asset allocation, or adjusted their investment strategy.
And then what happened? Within a couple of weeks, the market recovered. So, an investor who left their accounts alone through this fluctuation could see their investments not just rebound, but surpass where they were before. On the other hand, an investor who sold stock during that pullback period and now looks to buy back in would be making the quintessential error of emotional investing: selling low and buying high.
If this was your gut response, you are in good company. Nonetheless, it is a surefire way to lock in losses and stunt the potential growth of your assets. It’s like getting on a train and then, each time the train rattles, hopping off at the next possible stop. Every train rattles at times; if you keep jumping on and off, you’ll never arrive at your destination in time.
It’s not as if we suddenly have a volatile market: the market is volatile. It goes up and down like two sides of the same coin. It is expected that we will see occasional market corrections, in which there is a pullback following a period of growth. Since 1928, markets have averaged about three 5% corrections each calendar year.
The tradeoff for growth in the long term is living through market fluctuations in the short term. Keep in mind that real payment comes over time and not every month. The best tools for long-term investors are a well-diversified portfolio of stocks, bonds, and commodities, a thoughtful investing strategy that takes on an amount of smart risk that is appropriate for your situation, and the patience to allow for growth over a long time course.