When my daughter was young we read The Monster at the End of This Book starring Grover from Sesame Street. He’s convinced there’s a monster lurking at the end of the story. He’s so sure of this that he pleads with the reader to not turn the pages. When the pages are turned he panics and freaks out, but when he arrives at the end of the book there is no monster, just Grover. He was panicking for nothing.
When the market is volatile, or falling, investors panic. In panic mode, they make short-term mistakes that will impact their long-term goals.
Let’s review some recent history. The Dow Jones has risen 290% from the market low touched on March 9, 2009. During this great run, the Dow fell 3% or more 17 times and rose 3% or more 10 times. The largest drop occurred on August 8, 2011, falling 5.55%. The largest up day occurred on March 23, 2009, rising 6.84%. The average daily move over the past 2,418 trading days has been .06%, or $60 per $100,000 invested.
Investing in stocks is the best way to create long-term wealth, but in the short-term they’re irrational. A proper time frame may help you with your stock allocation, so here are some guidelines for holding stocks.
If you need access to your money in 1 to 3 years, do not buy or own stocks. Rather, keep your money in quality short-term investments such as U.S. T-Bills, U.S. T-Notes or CDs.
If your holding period is 3 to 10 years, invest in a mix of stocks, bonds and cash.
If your timeframe is 10 to 20 years or more, invest in stocks.
Trying to time the stock market and make money daily is a flip of a coin; it’s impossible to know how it will trade from one day to the next. Stocks have made money 73% of the time on an annual basis. They have made money 86% of the time over a 5-year period. For 10 years it has been 95% and over 20 years it’s 100%.[1]
If you’re not sure about your stock, bond, and cash mix, then a financial plan will help you align your investment portfolio to your goals and your tolerance for risk. You’re more likely to stay invested through rising and falling markets if you have completed a financial plan.
The stock market is not a monster. If you stay invested for the long-term and follow your plan good things will happen – just ask Grover!
Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land. ~ Ecclesiastes 11:2
10/11/18
Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.
[1] Ibbotson®SBBI®2015 Classic Yearbook – Market Results for Stocks, Bonds, Bills, and Inflation – 1926-2014