Should You Care What the Financial Markets Do Each Day?

March 20, 2020 3:00 pm ET

By: Stacey Nickens

Focusing on Your Strategy During Turbulent Times.

Investors are people, and people are often impatient. No one likes to wait in line or wait longer than they have to for something, especially today when so much is just a click or two away.

This impatience also manifests itself in the financial markets. When stocks slip, for example, some investors grow uneasy. Their impulse is to sell, get out, and get back in later. If they give in to that impulse, they may effectively pay a price.

The average annual return of the Standard & Poor’s 500 index from 1957 through 2008 is approximately 8%. Over the past 30 years, the average mutual fund stock investor underperformed the S&P 500 by 4%. Why the difference?

Mutual Funds are actively managed meaning that the manager can change the holdings at any time. During times of market downturns, they are subject to higher redemptions and may have to sell holdings to meet the cash withdrawals. Unintentionally, the long-term investor may be shifted to a short-term focus because of the activity in their mutual fund.

It’s important to remember that the return and principal value of stock prices will fluctuate over time as market conditions change. And shares, when sold, may be worth more or less than their original cost. However, in the long-term, stock prices rise or fall in conjunction with the profitability of the company. Being patient during times market downturns allows you to collect dividends and dollar cost average down into positions. These strategies help a portfolio recover much quicker than trying to time when to get back in the market.

Investors can worry too much. In the long run, an investor who glances at a portfolio once per quarter may end up making more progress toward his or her goals than one who anxiously pores over financial websites each day.

March 12, 2020 will go down in the history books as the worst trading day since the stock market crash in October of 1987. The market action combined with the blaring reminders triggered additional fear and panic in the markets.

There is a lot about the 1987 crash that the news pundits left out of the headlines. Despite the historic drop on October 19, 1987, the S&P 500 generated a positive return of 5.69% for the year.

Too many investors make quick, emotional moves when the market dips. Logic may go out the window when this happens, in addition to perspective.

Some long-term investors keep focus. Warren Buffett does. He has famously said that an investor should, “buy into a company because you want to own it, not because you want the stock to go up.2

Buffett often tries to invest in companies whose shares may perform well in both up and down markets. He also has famously stated, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”2

In contrast with Buffett’s patient long-term approach, investors who care too much about day-to-day market behavior may practice market timing, which is as much hope as strategy.

To make market timing work, an investor has to be right twice. The goal is to sell high, take profits, and buy back in just as the market begins to rally off a bottom. But there is volatility in financial markets and the sale at any point could result in a gain or loss.

Even Wall Street professionals have a hard time predicting market tops and bottoms. Retail investors are notorious for buying high and selling low.

Investors who alter their strategy in response to the headlines may end up changing it again after further headlines. While they may expect to be on top of things by doing this, their returns may suffer from their emotional and impatient responses.

Nobel Laureate economist Gene Fama once commented: “Your money is like soap. The more you handle it, the less you’ll have.” Wisdom that may benefit your strategy, especially during periods of market volatililty.3

Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

Citations.
1 – nytimes.com/2019/07/26/your-money/stock-bond-investing.html [7/26/19]

2 – fool.com/investing/best-warren-buffett-quotes.aspx [8/30/19]

3 – suredividend.com/best-investment-quotes/ [12/5/18]

4- https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp