Resources: Investing Basics: Volatility: Emotional Investing
When you’ve researched your investment options and participated for years, it can be frustrating to watch as volatile markets slash your accounts.
Some investors panic and sell off their investments during a downturn, only to see the market recover soon afterwards. Others try to “time the market” – sell during a downturn and buy during an upswing. Historically, this has proven difficult to do.
We offer some information on how to minimize your emotional responses and become a steady, educated investor.
Timing the Market
Trying to predict the best time to invest is not only difficult, it’s impossible. Investors who attempt to time the market often lose out on the market’s best performing days.
The graph below shows the returns of a hypothetical $10,000 investment in the S&P 500 on January 2, 1992, over the next 20 years. Where are the greatest returns? The investor who stayed in the market for the whole 20-year period reaped the greatest rewards.
The above graph shows an initial hypothetical $10,000 investment in the S&P 500 on January 2, 1992, which would have grown to $44,997 by December 31, 2011. That's an average annual return of 7.81% . Now imagine that during the same period, you pulled out of the market and missed the 10 best days of performance. That 7.81% annual return now falls to 4.13%.
Talk to your financial professional to make sure that your investment portfolio is meeting your long-term strategy.
Trying to time the market can be an inexact – and costly – exercise.
Managing your Emotions
In investing and life itself, managing your emotions is often the greatest predictor of success. It’s easy to get caught up in a narrow view of any situation and bypass long-term goals. It’s the same with your investments. Market flux is an everyday occurrence - even in the best of times, markets rise and fall.
While you can’t control the ebb and flow of the stock market, you can control your reaction to market volatility.
We offer you several long-term strategies for minimizing investor stress that will also help you maximize long-term returns:
Know your risk: Are you a risk-taker or do you like to play it safe? Our Personal Investment Profile Questionnaire helps you assess your risk tolerance.
Control your emotions: Research stock market trends so that you become comfortable with market volatility. Once you accept the facts about market trends, you won’t react to every minor fluctuation in market price.
Commit to the long term: When you decide to maintain your investment goals, the temptation to move assets around is reduced. This can reduce your stress.
Handling Market Volatility – 6 Tips
Here are six tips for coping with market volatility.
- Stay in the market. When investors sell, they increase their chances of missing major market movements that signal the start of a longer recovery.
- Invest for the long term. A study by the investment research firm Dalbar showed that the longer an investor held their investment positions, the greater their returns.
- Diversify your portfolio. A number of academic studies have shown that diversification – or allocating your assets over a wide variety of investment sizes and types – is responsible for over 90% of a portfolio’s performance variability over time. Note: Asset allocation/diversification does not guarantee a profit or protect against a loss.
- Consider asset allocation portfolios. Target-risk investments offer a wide selection of portfolios tailored for your risk tolerance. Our Principal Strategic Asset Management (SAM) Portfolios are an ideal way for investors to diversify their investments with one choice.
Target-date investments give investors the simplest choice of all: choose a date you will need the funds and your investments are actively managed towards that date. Our Principal LifeTime Funds have target dates through 2050.
- Remember the benefits of long-term investing. Long-term investing goals are achieved with the old adage: it’s a marathon, not a sprint.
- Stay in touch with your financial professional. News headlines can be sensational, but financial professionals can help you keep your sanity. They know your personal situation and financial goals, and are better equipped to keep you on track.
The Principal LifeTime Funds, which are target-date funds, invest in underlying Principal Funds. Each Principal LifeTime Fund is managed toward a particular target (retirement) date, or the approximate date the participant or investor starts withdrawing money. As each Principal LifeTime Fund approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investment options and reducing exposure to typically more aggressive investment options. The asset allocation for each Principal LifeTime Fund is regularly re-adjusted within a timeframe that extends 10-15 years beyond the target date, at which point it reaches its most conservative allocation. Principal LifeTime Funds assume the value of the investor's account will be withdrawn gradually during retirement. Neither the principal nor the underlying assets of the Principal LifeTime Funds are guaranteed at any time, including the target date. Investment risk remains at all times.
A mutual fund's share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.
Asset allocation/diversification does not guarantee a profit or protect against a loss.
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