Fear is one of the most basic human emotions. It is programmed into the nervous system and works like an instinct. From the time we are babies, we are equipped with the survival instincts necessary to respond with fear when we sense danger or feel unsafe. Fear helps protect us.
However sometimes our fear can do more harm than good, causing us to avoid doing something that we should or causing us to do something that makes the situation worse. Not all situations or danger warrant you running away from it. Similarly, sitting on the sidelines and doing nothing out of fear of what could happen, can be just as bad.
Fear makes people cash out their investments when markets take a downturn or when they fear that it MIGHT take a downturn- the latter people are dubbed the ‘Doomsday preppers’. It is only natural to want to avoid declines. The fear that keeps investors on the sidelines may save them that pain, but it could also ensure that they miss the gain. Historically, downturns have been followed by eventual upswings, although there is no guarantee that will always happen.
Trying to avoid risk could itself be risky, since it is impossible to know when to get back in. Invariably what ends up happening is that people abandon ship, cashing out their investments during market lows thus locking in the losses, and then return after the market has already begun to bounce back. So, they end up selling low and buying high which is exactly the opposite of what you should be doing.
The past couple months have been unsettling for many investors. But it is not the first or the last time that markets will take a dip. So, what should you do? The popular saying is that it is “time in the market, not timing the market” that is important. In other words, knowing when to invest isn’t as important as how long you stay invested. Generally, if you are invested for the long term you should stay the course.
I was recently reading an article that discussed the power of staying invested. It used a case of a hypothetical investment of US$10,000 in the S&P 500 over a 10-year period right after the 2008 to 2009 recession. If the US$10,000 investment hadn’t been touched during the full period, it would have grown to US$27,750, which is a compound annual growth rate of 10.75%. But missing 30 of the best days in that period would have put the investor in negative territory, losing 8.2% of the initial value.
This is the case I always make when new investors are considering our US$ mutual fund or an existing investor is thinking of selling their units due to market volatility. I remind them that investors who have stayed the course over the 17 year history of the fund, have seen their initial investment grow over six-fold, even with the many dips throughout the years including the 2008 to 2009 recession and the current COVID-19 induced fall in the unit price.
The lesson learned is, rather than trying to predict highs and lows, the best way to endure volatility is to stay the course with a long-term plan and well-diversified portfolio. Focus on the time you stay invested, not the timing of your investments.
Toni-Ann Neita-Elliott, CFP is the AVP Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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