Volatility and Remaining Calm

Recent market volatility has shattered the steady march upwards of the last year or so, but it should be put into a longer term perspective.  Since 2008 the stock market has had days in which it closed down at least 1% a total of 448 times for an average of 35 times per year.  How many of those declines do you really remember? 

Once an investor realizes that volatility is normal, then they start to recognize that investing is a battle between your present self and future self.  Investors tend to care more about current changes in wealth (present self) than their actual level of wealth (future self). A portfolio of $1mm feels much different depending on whether the starting point was $2mm or $500,000.  Yet the absolute dollar amount of $1mm is exactly the same.   Whose interests are more important to you - your current self or future self?  Does the recent change in the value of your portfolio matter to you more than its absolute value, and its ability to generate income and protect your purchasing power from inflation?   

The financial phase of life you are in will influence your answers to these questions.  If you have decades of investing in front of you, then your future self will likely be disappointed if you make rash decisions that alter the absolute future value of your portfolio.  On the other hand, if you are near or in retirement, then your future self may be happy that you avoided being greedy and used the profits over the last few years to prepare for retirement or fund your lifestyle.  Take a look at our sequence of return blog to better understand the financial impacts for those in the accumulation phase versus the distribution phase. 

At the end of the day, there is a winner and loser with every investment decision. Are you focusing on making the winner your current self or future self?  Reframing your thinking to better align your investment portfolio with your goals is an important part of a successful long-term plan.