Keeping perspective in a volatile market: Focus on what you can control
It's the key to avoiding mistakes
Stock market volatility in the first quarter of this year has shaken investor’s confidence. The media is fear-mongering and investors are worried. The not-so-distant recession still haunts investors. Money is emotional, and fear can come from lack of knowledge or preparation. Keeping perspective may be the single most important attribute for an investor to mitigate mistakes.
Investors have trouble keeping perspective for the long-term after a decade of underachieving returns, volatility, and the recent declines in the markets. The psychology of investing dictates that investors remember periods of declining returns and the most recent volatility rather than periods of high growth and the overall increase in returns over a long period of time. It is human nature. Here are some things to consider:
- Investment Allocations: Do you have a target allocation that is tied to your goals and risk tolerance? If so, is your asset allocation within the parameters of your target allocation? Many investors get caught off guard in a volatile market with out of balance allocations and taking inappropriate amounts of risk. Controlling these parameters help control risk and returns.
- Tracking: How are you tracking your portfolio? Many investors track their investments based on the returns over a short period of time. Tracking your portfolio based on the success of reaching your goals may be a better way to understand how your portfolio is performing. After all, achieving your overall financial goals is the most important aspect of investing.
- Choosing Investments: How do you choose your investments? Creating a disciplined approach using a list of criteria to choose investments keeps unnecessary risks out of your portfolio and funds that typically will outperform their peers. Continuing to monitor these funds is just as important as initially choosing your funds.
Investing is very much like life from the perspective that you must focus on the things you can control. Volatility in the market and the economy are similar to death and taxes – you can’t avoid them. As an investment advisor, I am often asked if the market is headed up or down or how the election might impact the economy. I express my opinions, but I am always brought back to my financial planning roots. In a sense, none of this really matters. Either a Democrat or Republican wins the election. If China solves their problems, another problem will arise somewhere else in the world. In short, there is always something in the world affecting the markets.
What you can do is worry about what you can control:
- How much are you saving and investing?
- Is your allocation appropriate and balanced?
- Have you chosen low cost quality investments?
- How are you tracking against your financial plans or goals?
As you navigate through this economy, try to keep a long-term prospective and focus on what you can control. This will lead to a healthier tolerance for the markets while mitigating risks.