2020 has seen several unexpected market highs and lows. When it feels like the market is inconsistent, or there’s a fear that it could potentially drop, many people act emotionally in their investment decisions. Rather than staying on track with their investing strategy, they deviate from their plan. In some cases, investors may choose to stop contributing to their retirement or other investment accounts altogether if they’re concerned about losing a large percentage of their portfolio. They may even be tempted to sell while the market is low in order to have some sense of control over their investments.
The truth is that money is an emotional thing. Seeing your portfolio dip and grow during a turbulent market can be overwhelming. However, it’s critical to maintain consistency when it comes to your investment strategy. This is true whether you are in the middle of a bull or a bear market.
Compound interest is a critical component of any investing strategy. You can think of compound interest as a snowball rolling down a hill. When you stand at the top of the hill and create a small snowball in your hands, it may not look like much. However, when you roll it down the hill, the snowball collects more snow on its surface. Little by little, the snowball grows. The bigger the snowball gets, the more snow it collects, and the faster it’s able to grow.
When you first start investing, the amount you’re able to invest in your portfolio may not seem like very much. Over time, as your balance grows and earns interest, it’s able to grow more quickly – just like the snowball rolling downhill. When you stop investing, you’re taking away the ability for your portfolio to grow at the same rate.
Did you know that the longer you have funds invested in the market, the more likely it is that you’ll see your portfolio grow? If you look at the stock market every day, there’s almost a 50/50 chance that the S&P will be positive. However, if you look at a sample of the S&P over the course of 20 years (1926-2015), it had a 100% positive annual return.
Getting caught up in the daily market ups and downs can lead to decisions that negatively impact your long-term goals. The longer you have your money invested, the more likely it is to bounce back from bear markets, earn interest, and grow.
If the market turbulence we’ve experienced this year has you questioning whether you should be involved in the market, remember that consistency is key to long-term investing success. When in doubt, reach out to a trusted financial advisor to evaluate your goals and the strategy you’ve developed. Together, you’ll be able to create a plan that looks at a long-term strategy rather than making impulse decisions based on short-term market volatility.
Are you ready to speak with a professional? Reach out to us today. We’re here to help you build a strategy that meets your needs.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.