Stock market's value has grown 320 percent since it hit rock bottom on March 9, 2009, but how long can investors expect this trend to continue?[i]
Most Americans have been watching in wonder as their retirement portfolios continue to rise. Whether you invest in a 401(k), IRA, 403(b), or TSP, chances are you have seen your retirement savings grow exponentially over the last twelve months. And the start of 2018 hasn’t shown any signs of slowing.
Will strong market performance continue? Can it continue at the unprecedented rate we see right now? That is THE question, and there is only one right answer.
Will the market continue to go up? I don’t know. No one knows.
I am asked all the time about what I think about the market or a particular stock or industry or technology. And while it is fun to talk about where things could be headed and when the market will pull back, the fact is no one knows.
Historically speaking, if you look at market performance over an extended period[ii], you will see moments of peaks and valleys, and then something in between. The market can have long up trends (2009 to now), sharp downswings (2007-2009), and it may level off for longer durations of time (2000 to 2010). It doesn’t matter which charts you reference, they all behave similarly.
The market can (and will) behave just about any way you can imagine, but predicting what it will do on any given day, week, or month is anyone’s guess. The only thing we can know for sure is that the market will eventually stop going up because economies are cyclical, and so are markets.
What matters when it comes to market performance?
I have lost count how many times since March 2009 (the most recent bottom) how many people have told me this run was going to end. At times I even believed it myself, but it didn’t matter.
What really matters has less to do with overall market performance and more to do with your financial situation.
How to stay focused on your finances
I tell all of my clients not to pay attention to the daily market movements. Daily market performance is just for a quick headline story, not something to take over your focus. If you let it distract you from your long-term financial planning, it can’t serve your economic interests. So here are three things you can do to ensure you stay focused on your finances in the midst of newsworthy market performance.
1. Set or Reset Financial Goals.
Don’t forget why you’re investing your money in the first place. Chances are it’s not just for the sake of building wealth, but what that wealth can presumably afford you. Are you now closer to that goal? Resist the temptation of getting caught up in guessing when to get out of the market. Keep your investment portfolio well-diversified according to a long-term game plan, and let it do its thing. Curbing emotionally-charged financial decisions is so essential for your long-term success.
2. Understand Your Risk Tolerance.
Making sure your assets are adequately diversified starts with understanding your risk tolerance[iii]. Risk tolerance is a gauge of the amount of financial risk you can stomach. Risk tolerance is unique to all of us, some are more comfortable being risky with money, and some are not. The key is to know what camp you are in before you invest.
3. Operate Within Your Risk Capacity.
Once you reevaluate your financial goals and understand your tolerance for risk, operate within the risk capacity[iv] you are comfortable. Knowing your risk tolerance is a guide for the types of investments you are likely to include in your retirement. Your risk capacity is a measure of how much of a loss you can handle without severely jeopardizing your financial goals and well-being. It will help you to make informed decisions about how much you can afford to lose.
Regardless of how the market is behaving in this moment, try to avoid making any sudden or rash decisions based on a feeling, fear, or speculation. Now is not the time to get out of the market, but it is the time to make sure you are protecting yourself.
If the market goes down, what does that look like for you?
If the market continues to go up, are you positioned to take the greatest advantage of strong performance without putting yourself and your financial future at too much risk?
These are the personal questions that matter more than when the market will stop going up. If you are wondering whether or not your investments still align with your financial goals, risk tolerance, and risk capacity, sit down with your financial advisor or contact me at Paul@lakeroadadvisors.com.
Everyone may wonder what the market will do, but you don’t have to wonder where you stand financially.
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