Staying calm when the market is volatile
During my recent trip to North America with Nefesh B’Nefesh I was privileged to meet hundreds of potential olim. And almost without exception all were concerned with the high pricing of the housing market in Israel and also with the state of their investments, given the apparent constant volatility of the investment markets both in the USA and around the world.
My article last month detailed some of the myths vs truths that surround the housing market (no, housing prices do not always go up … they are showing definite signs of stabilizing and actually dropping) and the stock market (no, you are highly unlikely to make 10%-12% profit annually with a medium risk portfolio). In this article I want to give over some tips that will help you feel more relaxed about your investments even when the markets are highly volatile.
- Make sure that you have an investment plan that matches your needs, and reassess it at regular intervals.
Your balanced financial and investment plan is crucial for your mental well-being. Identify your risk preferences and time horizon for investing to ensure that your plan reflects your needs. Even veteran investors can become unnerved by market whims – but volatility is an intrinsic part of investing. Stay strong. Financial journalists are constantly looking for dynamic headlines and exaggerate reality to fill their feeds. Ignore the media hype! Ensure that you never give in to a knee jerk reaction and make rash decisions that can hinder your ability to achieve your long-term goals.
If your investment plan has been constructed properly you will hopefully be able to ride out any drop, and benefit from the future recoveries. The market has been incredibly resilient over very long periods of time. However, if having done that you are still unable to cope with the constant media barrage corresponding to every blip in the market, consider realigning your investment plan and reorganising your investments. Working with a professional can often give you a better long-term perspective to help you cope with the ups and downs. Alternatively, improve your ability to filter the financial media which is constantly looking for the sensational headline, with no true deep understanding about what they are writing about.
- Market downturns are normal and usually short-lived.
Recognise that we live in a global village and falls in the market can be triggered by countless external factors. However, these drops are usually followed by recoveries.
Over the past 35 years even when the US market has experienced an average short-term drop of 14% over a part of the year, the year-end results still had a positive annual return more than 80% of the time.
In 2015 and 2016 US stocks experienced sharp drops: in August 2015, when China devalued its currency; in January 2016, as oil prices dropped; in June of 2016, after the “Brexit” vote; and in the run–up to the 2016 US presidential election. However, during that 2-year period, the market was up close to 8% cumulatively.
The Bank of Israel recently produced an interesting report comparing profits from the financial and housing markets in Israel over the past three decades. Everyone is aware of how inflated the housing market in Israel has been over the past decade, so it is fascinating to see the short and long-term comparisons, which offer conclusions that might surprise you. Whereas over the past decade the housing market outpaced the financial markets during the period of exaggerated increases in housing prices, the results are actually reversed when looking at a longer-term perspective of thirty years. So despite all the media hype surrounding the ballooning housing prices, your long term investment in the stock markets would actually have yielded a larger profit.
- Do not try to time the market – invest continually even during times of volatility.
Research studies have shown that those who buy and sell funds in an attempt to profit during market troughs and peaks, actually lose more money than those investors who held on to those same funds. No one can consistently react correctly to the good and the bad periods, including professionals. If you play the market in that way and miss even a few good days it can have a large detrimental effect on your entire portfolio.
Rather than try to judge and react when to buy and sell based on market conditions, your investment strategy should be to invest regularly so that short term downturns will not have as large an impact on your portfolio. You can remove the gambling element and diffuse some of your stress by having a consistent investment strategy. And sometimes what seems like the worst time to invest actually ends up being the most profitable period.
The best 5 year return in the US stock market began in May 1932 — in the midst of the Great Depression. The next best 5 year period began in July 1982, while the US economy was in the midst of one of the worst recessions in the post-war period, featuring double-digit levels of unemployment and interest rates.
Because no-one is a prophet the most effective long-term investment plans are those with the guesswork removed. And the knowledge that you have a balanced and long-term investment structure in place should help you ride out the market blips.
Almost everyone employed in Israel has forced savings plans such as kranot hishtalmut, kupot gemel, and kranot pensia that follow exactly this investment strategy. We don’t scrutinise the movements of those funds on an almost daily basis (in fact most of us have no idea where our investments actually are) and we should act in a somewhat similar way with all our investments. Obviously investment plans need to be monitored and adjusted at regular intervals (the regularity will depend on your stage in life, and when you might need to cash in your investments) … but if your plan is properly structured you should not need to react immediately to sudden fluctuations in the financial markets.
Life is stressful and there are many elements that are out of our control – the financial markets being a prime example. But use these points to help restrain your reactions and ensure that your investments are set up to provide for your needs. Let the media hype all it wants, and you can be more relaxed with your reality.