Imagine you were able to look into my crystal ball and see: a major terrorist attack on U.S. soil, we come close to a complete financial collapse in our banking system, panic over a terrifying disease, a drop in the market of almost 40 percent, and the unfolding of the worst oil spill in history, just to name a few.
Knowing all that, would you still invest in the market?
If your answer is no, then you should be thankful you didn't have the gift of foresight. All of these things have happened since 2001, and if you invested in the S&P 500 while the market was dropping in December of 2001, you would have had returns close to 80 percent by now. (I'm using December because it gives a good example of the "averaging down" benefits of investing through a downturn.)
This example is similar to an investing article that I remember reading in 1997, and it has stayed with me for all these years. It expressed a very powerful concept for long-term portfolios, which has still held true since I read that article 18 years ago: When you combine investing with the emotional ups and downs of the news, good things will most likely not happen.
The Wall of Worry
I'd like to say, in my 23-year career, the market has always climbed over a wall of worry.
There is always something to worry about in the short run that makes investors nervous, but when it comes to planning your portfolio you generally need to think in terms of years, not days or months.
For example, let's pretend you took a month long vacation to a secluded island starting in late September last year. When you came back, you would have missed the 9 percent dip in the market over the Ebola scare that made so many people extremely worried. In that case, the market went down, and rebounded very quickly -- when you returned, you would have had the same results, only without all the emotion.
The same holds true for bigger drops, like the one we had in 2008.
If you'd sold when the market was down -- let's say, 20 percent -- you would have missed the bottom, when the S&P 500 fell even further to 37 percent. But would you have gotten back into the game in time for the market rebound? From what I saw, many people who pulled out didn't.
This is because there's one major problem with market timing: You have to be right twice.
First you have to get out before the bottom hits, but then you have to get back in before your original selling point. If you don't manage it, you'll lose money. Emotionally, this can be even worse than riding through a gut-wrenching downturn because your losses are realized, rather than "paper" losses.
Unfortunately, once emotion takes over (and it usually does in these situations), it's very difficult to make the right investment decisions. Fear and greed are just not a good investing strategy. A great way to handle this is to know your exit points before you enter an investment.
Worry Presents an Opportunity
You can also look at your portfolio with patience and a level head by treating worry as an opportunity.
Because we don't know what's going to happen, I generally advise long-term investors against making decisions based on fear. Instead, if markets do go down, I look at it as an opportunity to average down on your portfolio (for the purpose of this article, I'm speaking about a well-diversified portfolio as a whole).
In other words, continue to make purchases of investments you believe in. By doing this, you're hopefully locking in a lower price and setting up your portfolio for the possibility of longer term growth. This is a big picture, very long time horizon strategy, and I believe that it's the best way to set yourself up for long-term growth.
Of course, that being said, short term volatility can be hair-raising. So what do you do? Diversify. By going into a variety of asset classes, you can help reduce the pain of downturns. Take a look at my article "Institutional Investing for the Individual Investor" for more information.
What You Can Do Today
I've talked to a lot of people who are worried about oil prices, the stronger dollar and interest rates falling. Do low oil prices mean the world economy is weaker than we think, or will it create a cash windfall for consumers that spurs more growth in the future?
There are a lot of questions, and not a lot of clear answers. Unfortunately, we can't make investment decisions by going back in time after things happen; we have to invest in the moment and remember that, oftentimes, we're actually just worrying about the same old story -- only with different villains.
So, instead of waiting and hoping for an answer or trying to predict the future, I suggest you go with what we do know: that over the long run, the market tends to do better than we ever could have thought possible in light of all the bad news there is.
By diversifying and keeping an eye on the big picture, I believe you can ride out any volatility and reap the enormous benefits of being a patient investor.
Of course, I have to include this very important disclaimer: Past performance doesn't guarantee future returns. We never know what the future holds, which is why the idea of a historical crystal ball is so appealing. Also, remember that everyone's situation looks different: maybe you don't have time on your side and need money for the shorter term, or perhaps you just don't have the stomach for these kinds of volatile swings. If that is the case, then you need to invest accordingly.
In all cases, speak to your financial advisor about what investing strategy would work best for your particular situation.
But in the meantime, when it comes to investing, try to keep an eye on the years, not the days.