If one listens to the chatter throughout the financial media, you are most likely at your wits end in worry. No matter how much we may tell ourselves that this is not another 2008, the gnawing doubt in the pit of our stomach remains.
Let me say categorically that we are not entering another financial crisis. The stock market is not going to drop 50% from here, no matter what some strategists are saying. If you have been reading my columns since 2007, you know that when it’s time to raise cash I say so. This is not one of those times. You may not agree with me, (although you want to) so let me give you some food for thought.
Although the stock market and the economy do not necessarily perform in lock step, over time, they tend to trend in the same direction. The U.S. economy is growing moderately, employment is rising and there is nothing on the horizon that indicates that the economy is changing direction. This is decidedly different from 2008.
On the other hand, the stock market over the course of the last year or so may have gotten a bit ahead of itself. It is this discrepancy that is behind the present correction within the financial markets. As the economy continues to grow and interest rates begin to rise, investors are searching for a price level that more accurately reflects this new environment.
This adjustment period is almost over. The ultimate level in which investors finally agree that stocks represent “fair” value may be here or a 100 points lower on the S&P 500 Index. If your time horizon is anything longer than next week, that level should not be as important as the longer term direction of the market. To date, there is no evidence that the stock market has changed its long-term trend, which is up.
Over the past several years, most investors have experienced fairly good gains in their portfolios. To some extent, the market’s stellar performance since the financial crisis has conditioned investors to expect more of the same. Anything less fills us with consternation. The problem is that expectation is not based in financial reality. Markets go up and markets go down.
It would be just wonderful if you (or your financial advisor) could time the market: selling at the top and buying at the bottom. Unfortunately, no one has been able to do that consistently in my experience. Investing is a process where no one catches the bottom (or the tops) but instead invests along the way. Normally, the best time to buy is in an environment like we are experiencing right now. Conversely, it is absolutely the worst time to sell (although emotionally that’s just what you want to do).
How do you keep from making emotional decisions with your portfolio that you will regret later on? Stop looking at your account every day or week. Does knowing what you gained or lost on a daily basis help you make investment decisions for the long-term? Compare your attitude towards the stock market with how you look at the real estate market.
Ask yourself this question, how much is your house worth today? You don’t know, do you? And yet, for most of us, our house is worth more (in many cases several times more) than our financial portfolio. If your house were to fall by $10,000 by the end of this month, would you sell it? Of course not–because it is a long-term investment. In order to invest successfully, you must view your financial investments in the same way.
Don’t get me wrong, losing money (even if it’s only paper losses) hurts like the Bejeezus, The pain of losing is far worse than the joy of gaining. It’s just how we humans are built. Just remember, we have all been here before and those who have stayed the course have benefited the most. This time will be no different.