The stock market volatility experienced this month is creating concern among investors that a market downturn may be more than just a correction. On October 24, the sell-off on Wall Street knocked the Dow Jones down more than 600 points, wiping out the gains for the year for the blue-chip average and the broad Standard & Poor’s 500 index. On October 10th, 2018, the Dow dropped 830+ points. These market drops were large, swift, unexpected and certainly large enough to garner front-page headlines and get everyone’s attention.
Will this volatility be significant and prolonged? Many economists believe that growth will start to slow next year as the effects of last year’s sweeping tax cuts and increased government spending start to subside. This type of prediction can often lead to an overreaction from the investment community. As a consumer, we need to remain level-headed and think long-term when it comes to retirement planning. Below are a few things to remember:
- Having an Investment Plan is Important – It is impossible to succeed in any endeavor without a plan and investing is no different. A plan will focus on your long-term objectives and put you in the best position to achieve them. Emphasis is rightfully on the “long-term” as opposed to the “short-term”. The short-term is the domain of pundits, talking heads and snake-oil salesman. It is also what gets your attention when you turn on the television and therefore also what sells advertising. So take it all with a big grain of salt.
- Having a Personal Financial Plan is Important – Benjamin Franklin is credited with saying that “Failing to plan is planning to fail”. One of the very first steps you should take is develop a personal financial plan which takes into account your goals, objectives, risk tolerance, needs and wants. This plan is critical in helping determine the risk you need or are willing to take in order to achieve your long-term goals. It is a “living document” and one that should be updated on a regular basis to make sure that you are on track to achieve your long-term goals. Just as with the investment plan, each plan is a critical step in mapping out your financial future. With a financial plan, it is easier to make financial decisions, avoid emotional reactions and stay on track to meet your goals.
- Diversification is Important – Simply put, the reason all of your portfolios are diversified is largely because no one can predict the future. An important part of diversification is that your portfolios have a mix of equities and bonds. Bonds are boring but they act as a shock-absorber during times like this. Even though bonds move up and down in price like other assets, they are a lot less volatile than stocks and serve to reduce the amount of downward movement in every portfolio.
- Patience is Important – Reacting to short-term noise and volatility has been proven to be very harmful to your financial health. Yes, there is a time to be defensive in the markets, but these decisions should only be made after carefully observing economic and market indicators for some time. At this point, the evidence points to the fact that we are experiencing a “normal” market correction, even if it hardly feels that way.
These four simple and easy-to-follow steps should help with retirement planning during any economically harsh climate. We can’t control the stock market but we can certainly get a tight grip on our finances to avoid financial depression. As the economist and academic, Robert J. Shiller, says, “Finance is not merely about making money. It’s about achieving our deep goals and protecting the fruits of our labor. It’s about stewardship and, therefore, about achieving the good society.” With the help of a financial advisor, we can set our minds to think in long-term financial steps, regardless of the state of the stock market, that can lead us towards a much more successful future with added wealth and value.