Extra, Extra! Why Financial Headlines Shouldn't Drive Your Investment Decisions

6/21/2022 - By Sarah Horne

With recent news reports on 2022’s stock market volatility, it's hard for investors to tune out the noise. Alarming financial headlines can challenge investors’ resolve as they weigh their options. It’s tempting to question your approach and reverse course in the face of market adversity, like switching lanes in standstill traffic. Yet evidence has continually shown that investors who remain disciplined during market selloffs benefit from future market gains by staying committed to their financial plan.

So why should investors stay resolved and fight the temptation to sell out of their investments in tumultuous times?

When faced with market volatility many investors look to get out of the market to minimize the financial losses and emotional toll. However, predicting the future is difficult. Assuming investors could get out “in time” to avoid a deeper loss, they are now tasked with an equally difficult decision: choosing the right time to buy back into the market. Until they re-invest their money, investors pay another steep price for safety: the loss of purchasing power. With high inflation and cash accounts offering low interest rates, investors’ money loses value to inflation when they hold more cash than is necessary to cover upcoming expenses and emergency needs through a down market cycle.

What if investors time their re-entry perfectly?

They might be fooled into believing the process can be repeated during the next market downdraft. Over an investor’s lifetime, they can expect to be faced with this level of volatility another 10-15 times, as markets cycle through normal periods of growth and decline. The odds of achieving the same results for every market decline are incredibly low.

Instead, investors are better off staying invested over their lifetime, because market gains historically follow market declines. In the same way it’s difficult to predict the bottom of the market, it’s also difficult to predict when stock prices will peak again. When investors sell assets during a market decline, they can miss the returns that follow. In the two years after the 2008 financial crisis, the S&P 500 returned an average of over 18% per year. Investors who were out of the market did not benefit from those gains. On the other hand, disciplined investors enjoyed the market rebound without adjusting their strategy.

Investors might itch to change their portfolio after a shift in the market. However, timing the market is futile, and history shows that staying the course has produced better results. Investors who resist the urge to sell during market downdrafts are positioned to benefit from the next market upswing. For these reasons, it’s best to stay true to your financial plan and ride out the volatility.

Questions?

If your investment strategy needs attention, a fiduciary financial advisor from Saltmarsh can help. Beyond designing a portfolio tailored to your objectives and risk tolerance, Saltmarsh Financial Advisors can help you understand the news reports and how large-scale economic events affect your financial plan. Request to speak with an advisor today.

About the Author | Sarah Horne

Sarah is an associate for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. She is responsible for the research and preparation of investment proposals. Sarah also assists with the creation and maintenance of client files and communications. Before joining Saltmarsh, Sarah was a representative at a financial planning firm where she provided educational and holistic guidance on financial topics including budgeting, retirement planning and financial risk management.