Ah, market volatility
I hadn’t been tracking my investments lately, but Twitter was afire with talks of panic and fear in the market as it crashed and burned. So, I logged into my investment accounts and saw that they were down. It might be around 10% or so, but again, I haven’t been tracking my investments, so I don’t precisely know.
Regardless, there was no market crash, just a correction. And yes, that certainly could change.
However, all of this tweeting got me thinking about how many new investors have joined the market since The Corona Crash.
My prior employer, one of the largest brokerage and advisory firms, has reported unfathomable account growth over the past year or so. It is a crazy time in the world of investing, not rivaled since the dot-com boom, or so I hear (I wasn’t even in high school at that time).
While it is magnificent to have new savers preparing for their future, market corrections and market crashes can cause fear; fear of the unknown and what comes next.
Nevertheless, you have nothing to worry about if you invest in a diversified manner.
You see, market rallies come and go. What remains are zigzags on the ticker chart and an ever-fluctuating balance in your investment account.
Some days you’ll see gains of 2%, while on others, you’ll see dives of 3%. However, with time and a diversified indexed portfolio, the up-days have historically outweighed the down-days, similar to the number sequence below:
+2-1-3+4-1-1-3+2+2-1+3-2-1-5+1+3-2-1+2+1+1-1+2+1+3-2-1+2+1+1+3-1-1+2-1+2+1-1-3+4-1-1-3+2+2-1+3-2-1-5+1+3-2-1+2+1+1-1+2+1+3-2-1+2+1+1+2-1-3+4-1-1-3+2+2-1+3-2-1-3-2= 10% increase
The key to understanding this trend is that portfolios are fluid, not static. And while you may see bouts of underperformance, they too will pass. After all, you are more likely to see extended gains the longer you participate, so don’t stay on the sidelines!
But why do diversified indexed portfolios go up over time? The simple answer is that the global economy is growing and has continued to as human innovation drives change and commerce. Therefore, a bet against the economy means doubting humanity, and we are far more productive today than ever.
So, let’s take a step back and ponder.
If you decide to sell your portfolio to lock in its value, you freeze it, capturing that moment like a photograph in time. Gone is the chance for gains and losses, but what remains is an ever eroding value from inflation.
Snap! Your portfolio depicts something that no longer is. A culmination of days passed. And just like a developed photograph, it fades with time as inflation increases.
Hence, if you sell after a market crash, you forever stay at that market bottom, with your cash acting as an ugly reminder of your mistake. Likely the pain will fade with time, but so will the value of your funds. It is a terrible predicament.
But what if you sell at the top of the market? Are things better then?
Instead of being reminded of a market crash, you applaud yourself for being more intelligent than a non-sentient force (the market is not a living entity, after all). You then stay on the sidelines waiting for the next golden opportunity, missing out on growth and assuming you can repeat the statistically untenable.
Consequently, the opportunity cost of both scenarios is substantial because the longer you are out of the market, the more you miss out on the market. And remember, while the market has gone down numerous times, it has historically always gone up.
So, instead of timing the market or letting your savings sit idle, go with the flow and invest within your risk tolerance. (If you aren’t sure what your risk tolerance is, be sure to read my article on You’re Investing Wrong: How To Use Portfolio Construction.)
The result will be a portfolio that sometimes is up, other times down, but always moving with the market relative to your risk preferences. And remember, no gain or loss is permanent until you make your final trade.
In closing, avoid selling during drops and don’t sell at the tops. Only trade your investments for cash when needed because speculation is always an estimation. And estimations are rarely precise, so don’t roll the dice. Best of luck on your journey, and as always, have a great day.
P.S. we still aren’t in a market crash, but personal finance is on FIRE!
[Today’s post is strictly educational and is not investment advice. Since I am a part-time investment advisor, I have to say that, no matter how silly it sounds. You can view my website disclosure statement here.]
Mile High Finance Guy
finance demystified, one mountain at a time