The media is having a field day with the latest financial panic. It makes for great headlines and photo ops, and endless commentary from experts, few of whom predicted this drop but all of whom believe they know what will happen now.
But for a long-term investor, events of the last few days and weeks are not terribly
The real news? In the past 10 years, a diversified portfolio of low-cost mutual
funds investing in stocks, bonds and alternatives would have more than doubled, producing an annual return of about 7.5%.
If you are a short-term investor who lives by the day’s headlines, you probably sold too
late and are waiting to get back in, after the market has “settled down”. This “sell low, buy high” reaction will condemn an investor to disappointing investment returns. The short-term investor will also pay higher trading commissions and taxes that drag down returns further.
If you are a long-term investor, you won’t let recent events impact your strategy. You have sold nothing in the past few days. At some stage in the next 3-12 months, you will look to “re-balance”, meaning you will sell a bit of what has gone up and buy a bit of what has gone down. This year, that will probably mean buying stocks and selling bonds. This “buy low, sell high” discipline will boost your returns.
None of this means the savvy investor is oblivious to what is happening in the
world. Instead, he focuses on long-term developments. For example, in the past decade, the US stock market’s size has become an increasingly smaller percentage of the global stock market, due to greater economic growth outside the US and the dollar’s decline. (The US market is now about 40% of the world market). The savvy investor has periodically shifted their investment holdings to reflect this reality.
It’s not easy to sit still when the markets are tumbling and the business media is screaming. But this crisis will pass, and you will be happier — and wealthier — if you don’t panic.