​​Don’t act on emotion in market swings

When the Dow Jones industrial average went over 26,000 in January 2018, you’d think most investors would have been thrilled. But money can have a strange effect on people, especially when their retirements are at stake.

Whenever stocks hit a new high, investors are tempted to act – to do something, anything – to try and lock in their gains. It’s an emotional reaction to the market’s performance in the short term.

But for many, this could be a costly mistake:

• It requires you to make not one but two decisions correctly – when to get out and when to get back in;
• Depending upon whether the market is going up or down when you withdraw, you could miss additional gains or a potential rebound; and
• In either case, you could miss all the potential growth on that money going forward.

Don’t just take it from me; take it from Vanguard founder Jack Bogle: “Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible and benefit from the compounding dividend yields and long-term earnings growth.”

Let’s look more closely at that last sentence.

First, the best strategy is to stick to your long term financial goals. You can scratch that emotional itch by reviewing your plan annually and rebalancing your holdings quarterly.

Second, you don’t want to lose the benefits of compounding.

Consider the Standard & Poor’s 500 index, which comprises the 500 largest companies in the U.S., compared with the Dow, which comprises only 30 companies. *From 1990 to 2016, the S&P 500 would have brought an average annual return of 10.1 percent to an investor who stood pat the whole time (more than 9,000 days). But an investor who missed out on just the best 15 of those 9,000-plus days would have seen only a 6.1 percent average annual return. One who skipped the best 30 days would have earned only a 3.5 percent average annual return.

The S&P 500 has averaged an annual decline of 14 percent at some point in each year since 1980. That doesn’t mean the stock market has ended the year down 14 percent. A recent example is January 2016: The S&P 500 was down 11 percent in that month but ended 2016 with a gain of more than 10 percent. Therefore, if you exited the S&P 500 at the end of January, you lost 11 percent compared with earning 10 percent for the whole year. That is a 21 percent difference in your annual return. Mistakes like that can devastate your financial goals.

So, don’t try to time the market. Stick to your overall financial strategy.

Of course, we are human and things can change in life. Therefore, that plan requires occasional maintenance and updating. These changes should be based on your financial needs, goals and objectives without regard to what has happened in the stock market lately.

This brings out another human trait: procrastination. Many investors who know they should rebalance their portfolios never find the time to sit down and do it – hence the popularity of target retirement funds, which rebalance automatically based upon projected retirement date. Of course, the strength of such funds is also their weakness; estimated time until retirement is usually their only criterion. They have no information on, and don’t attempt to account for, how far along you are in your saving or what your income goal is for retirement.

This is where an experienced financial adviser can bring value to a client. I help my clients create that overall analysis plan to help realize their retirement goals. I review each client’s plan with him or her annually. And I can handle the quarterly rebalancing.

But whether you work with me or another financial professional, or try to do it yourself, the best advice I can offer when the market calls in a moment of excitement is to hang up and stick to your plan.

This article was written by Adam B. Carlat, a Glendale-based financial adviser and Chartered Retirement Planning Counselor^® with One2One Wealth Strategies. Questions? Call (623) 850-0016 or email Adam@121ws.com.

The opinions expressed in this article are those of Adam Carlat and are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your tax, legal and/or financial services professional regarding your individual situation. The views expressed in this letter are those of the author and may not necessarily reflect those by PlanMember Securities Corporation.

Representative registered with and offers only securities and advisory services through PlanMember Securities Corporation (PSEC), a registered broker/dealer, investment adviser and member FINRA/SIPC. 6187 Carpinteria Ave, Carpinteria, CA 93013 • (800) 874-6910. One2One Wealth Strategies and PSEC are independently owned and operated companies. PSEC is not liable for ancillary products or services offered by this representative or One2One Wealth Strategies.

*Source: Morgan Stanley Wealth Management GIC

Investors cannot invest directly in indexes.