With markets so volatile, the human element to investing is very important
The market skyrockets one day, plunges the next. Is this the wobbling before the crash? Should you invest now? If so, how? Everything at once? That’s tempting, but not always wise.
A common question investors ask their financial professional is this: “Is it too late to invest in the stock market?”
Many people maintained large cash positions since the COVID-recession ended in April 2020 – which was only two months long and the shortest recession in U.S. history. And if those people have not yet invested, they missed the major U.S. equity markets (the S&P 500, the DJIA and NASDAQ) come really close to doubling in about two years – and that’s inclusive of the pullback through mid-April 2022.
In addition, since the COVID-recession ended, the S&P 500 CBOE Volatility Index (VIX), an oft-cited yardstick of how stocks move up and down, declined by 2/3, peaking at about 66 and declining to the low 20s. That indicates market turbulence, although nowhere near as much as back in March 2020.
What is Your Goal for Investing?
If the investing question nags you, first clarify what you’re pursuing with your money.
Maybe you have long-term goals and objectives, such as leaving a legacy or ensuring that you don’t outlive your money – which usually requires investing in the stock market, which historically outperforms other market classes over the long term (with some scary downswing along the way).
Even if you come to understand the necessity of investing, you may be reluctant to re-position a large amount of your cash in a market that continues to hit record highs and see staggering dips on any given day. What do you do now with cash?
Behavioral Finance Becomes Critical
Behavioral planners look not just to your financial understanding, but also to the human element in your investing. Behavioral finance holds that people make decisions based on impressions and beliefs rather than on hard facts and rational analysis. And if you’re like most people, you tend to hurt more when you make a decision that appears incorrect, than when you score a victory.
For example, if you decide that you have $100,000 to put in the stock market to generate returns you need to reach a certain goal, do you invest all today or invest gradually over time? If you invest the entire $100,000 as a lump sum in the market today and Wall Street suddenly tanks, you may regret the move – at least on a gut level and when looking at only the short term. If this regret inspires you to reverse course and sell the investment, the future gains you never realize in turn hurt your overall returns in the long run.
On the other hand, investing systematically over time might lessen some of the regret. Investing $10,000 a month over 10 months or $20,000 for five months can ease your mind if the market declines initially and rebounds later. This investing, aka dollar cost averaging (DCA), often works well in market downturns.
Does DCA make sense for you? It does for many. The method can give investors good long-term results – and confidence that may lessen some worries about money.
You don’t necessarily want just an investment portfolio that looks good on paper – but an appropriate investment portfolio and investment experience to work towards your goals.
Relate your money to your life work with a financial professional who can work with you on your behavioral investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
The NASDAQ-100 is composed of the 100 largest domestic and international non-financial securities listed on The Nasdaq Stock Market. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology, but does not contain securities of financial companies.
The CBOE Volatility Index (VIX) is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a market-based estimate of future volatility. When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive it does measure the current degree of fear present in the stock market.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by FMeX.
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