How to Stay Calm During Turbulent Stock Markets explained by professional Forex trading experts the “ForexSQ” FX trading team.
How to Stay Calm During Turbulent Stock Markets
January 2016 may end up being the worst stock market start in Wall Street history. Should you cash in your stocks now, or hang on?
The highest price for the Dow Jones Industrial Average occurred in May 2015 when it reached 18,312. The market began a gradual decline last year and it closed at 15,767 on January 20, 2016 (a loss of 2,545 points; a total loss of 13%; an 11% loss in January).
What About History?
Historical trends show if the market has a positive January there is a good chance the year will be positive.
Conversely, when January is negative, there are increased odds the year will be negative.
Robert Johnson, president of The American College of Financial Services said: “Based on the performance of the S&P 500 total return index (including dividends) this relationship has proven to be true 72% of the time (1966 to 2015). Any indicator that predicts the direction of the market correctly 72% of the time should be taken seriously.”
Again, that leaves you wondering, should sell your investments now and go to cash?
The stock market does not like any form of uncertainty that can negatively impact global economies and the earnings of publicly traded companies. In 2016, we have the double whammy – a major slow-down in the growth rate of the Chinese economy and an oil glut.
There is uncertainty because no one knows how these two events will impact the global economy. Some pundits are even concerned these events will trigger a recession.
Would you be better off getting out of the stock market?
There is a good chance you have a financial advisor telling you what to do with your money. There is an equally good chance your advisor created high expectations when he or she sold you investment services and products.
High expectations help advisors sell products and often get the customer less concerned about investment expenses and risk.
Both expenses and risk have a much greater impact when your assets are producing negative rates of return.
The top four questions you should be asking are:
- What were your performance expectations when the markets were going up?
- What were your performance expectations when the markets were going down?
- How did your advisor help you focus on your long-term goals and show you how your investment plan works toward helping you accomplish them?
- What did you pay for the advisor’s services?
Did you have the expectation that the market would go up and your portfolio would go up each and every year? If so, your advisor did not do a good job of educating you. Realistic expectations lead to better investing decisions.
A good advisor should always help you set realistic expectation so that market volatility is not a surprise to you.
A Crystal Ball
Is it too late to bail out of the stock market? The market is down more than 2,500 points. Should you bail out now before it goes down more?
No one can predict the bottom of a market decline just like they cannot predict the top of a rising market.
You have a simple choice to make that is based on two realities:
- Do you believe you are receiving sound advice from a competent financial advisor?
- Do you believe you own high-quality investments? Stocks? Bonds? Mutual Funds? ETFs?
See if this line of reasoning makes sense to you:
- If you believe you are receiving competent financial advice, follow it.
- Why would you sell high-quality investments and convert to cash after the market has already gone down, and thus take on the risk that you may miss the recovery?
- Do you believe you have a crystal ball that will tell you when you should get back into the market?
There is no concrete evidence that trying to time the markets works. Most people get out late so they absorb most of the loss. And, they get back in late so they miss most of the gain – most market gains occur during short time periods.
The simplest solution is to stay invested. Rely on the quality of your advisor and investments to produce your future performance over the period of time (many years) that they need to do their job.
One-way to sleep better at night is to remember stocks have always out-performed bonds and bonds have always out-performed cash equivalents over longer time periods.
These relationships have to exist or no rational investor would take on the additional risk of owning stocks or bonds.
It is only a matter of time before the market changes direction and achieves new highs. This has been true since the inception of the stock market and it will be true this time too.
How to Stay Calm During Turbulent Stock Markets Conclusion
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