Handling Market Volatility: What Successful Investors Know.

When markets are volatile, it's tempting to change something in your investment plan simply because other investors seem to be running for the exits. Keeping a cool head when others are fearful is one of the best strategies for managing through periods of uncertainty. As humans, we are all subject to our emotions. We all feel the same urge to take some action in our portfolios when the headline news seems dire and daily account values fluctuate. Being a successful investor doesn't mean being immune to fear. But it does require that you not be governed by it.

For successful investors, patience and discipline are the two most important tools in their financial arsenal.

Successful investors recall that since 1926, US stocks have been positive about 73% of the time[1]. So, even though this means stocks moved lower in 27% of calendar years, it also means there have been far more good years than bad. Successful investors are willing to tolerate the down years, and hold stocks during inevitable corrections in order to benefit from their higher expected future gains. They are willing to buy more of the stocks they hold when prices move lower because they recognize the importance of buying low and selling high.

Discipline = Higher Long Term Returns

Unfortunately, most investors fail to realize the full returns that stocks have offered because they move into and out of postiions at eactly the wrong times: selling when markets are lower, and buying after they've moved higher. Despite much evidence to the contrary, some people sincerely believe that they can move into or out of certain assets in advance of market moves in order to avoid losses, but still capture sufficient gains to meet their long term goals. Consider the following: since 1993, US stocks have experienced an annualized return of 9.2% [2], essentially doubling each dollar invested every 8 years.

$10,000 if fully invested in 1993 would have have been worth over $58,000 by 2013. But if an investor missed just 10 of the best days during that 20 year period, they reduced their return by almost 50%. Missing the best 20 days reduced returns a whopping 67%! Market timing is a fool's game. But staying invested, in both good times and bad, increases the probability of higher long term returns.

Fortunately, success as an investor does not depend on having a crystal ball. It depends on intelligent asset allocation, disciplined savings and consistent rebalancing. It also requires committment and patience, especially when everyone around you seems to be losing their heads.

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Footnotes:

[1] Stocks are represented by S&P 500 Index.

[2] US stocks measured by annualized returns of the S&P 500 Index from 1993 through 2013.

See Disclosures.