It’s been a dramatic few weeks in the stock market- for many investors a little too dramatic.
Let’s take a step back and review what occurred and how you should respond to it. The stock market, which is in the midst of a six-year bull market, stumbled, falling into “correction” territory—namely 10% below its recent highs. This territory was reached for the first since 2011.
More recently, the market has rallied out of correction territory and is near flat for the year. For long-term investors, the volatility has been a source of stress. But it’s a bad idea to depart from your long-term plan and make impulsive decisions, such as selling in an attempt to protect your capital, or buying on dips in an effort to scoop up “bargains.”
The key to investment success is to have a good plan and to be patient. Studies have shown that when investors start making decisions based on short-term factors like market corrections, they get themselves in trouble.
According to research firm Dalbar, the S&P has returned 9.22% annually over the past 20 years, on average. But the typical investor in the S&P earned more than four percentage points less. One major factor: investors acting impulsively.
Though investors’ emotions may tell them to sell, sell, sell when the market is in a rout, this results in turning paper losses into real losses. And it leaves them no choice but to buy back into the market when it’s recovering—and more expensive.
Successful investors recognize that market corrections are a normal part of bull markets. They can help the market “cool down” after it’s run up too far too fast. Instead of trying to maneuver around market dips, they create portfolios that are designed to navigate through them.
Over short periods, all portfolios may experience negative performance. But the longer one stays in the market, the more risk tends to diminish. And it’s the long-term results that matter when preparing for long-term goals such as retirement.
However, it’s also important to factor peace of mind into your investment planning. If market volatility keeps you up at night—and you’re even tempted to try to time the market, you may want to add a worry-free layer to your portfolio.
One option for this is income annuities, which we blogged about in May. Income annuities can provide a stream of income that’s guaranteed to last throughout your lifetime.
Another option to consider is a custom-designed permanent life insurance policy. These policies can provide fixed returns and help you to achieve financial independence as well. Both income annuities and permanent life insurance are worth investigating, especially in an era of low bond yields and stock market volatility.
If you do choose to incorporate these alternatives into your portfolio, be sure that they complement your other investments properly to give you the best chance to achieve your goals. Though emotions may be running high, the best policy is still to create a thoughtful plan and patiently execute it.
