Last posted by Carl Engelking | Northwestern Mutual
If you pay attention to the stock market, you’ve probably noticed some dramatic swings from one day to the next.
That’s what uncertainty does in the short-term. On any given day, the market may rise on news of trade deals, only to fall the very next day when those headlines turn out to have been too rosy. Foreign currencies fluctuate. Oil prices are all over the map. With so many factors moving the market, how do you stay anchored?
With a little perspective and a lot of planning.
If you’ve built a comprehensive financial plan, you should have money tucked away in an emergency fund to cover immediate, unexpected expenses. You may have a life insurance policy to protect your family from financial hardship if you pass away unexpectedly. You’re likely putting money into retirement accounts to grow a nest egg you’ll rely on many years from now.
In other words, investments tied to the stock market are just one tool in your larger financial toolbox. Some tools will be useful today, some are best used many years from now, while others are there “just in case.” Investments are typically a long-term growth play, which means you shouldn’t be selling them to pay for a new furnace when the old one conks out – there’s an emergency fund for that. When stock markets get volatile, it’s crucial to remember the specific role stocks serve in your plan. If it’s for long-term growth, you don’t need to worry about market volatility.
For Brent Schutte, chief investment strategist at Northwestern Mutual, volatile markets call to mind one of his favorite analogies to explain the importance of sticking with a long-term financial plan through thick and thin.
THE ROAD AHEAD
Let’s say you commute to work every single day. You’re probably going to take the fastest, most efficient route. In normal conditions, this is the ideal path that you’ll stick to day in and day out. Unless you really crave novelty, you aren’t going to reinvent your commute every morning based on how you’re feeling.
Building a long-term financial plan isn’t all that different. When you’ve appropriately balanced your risk, put safeguards around what you have and maintain a clear vision of where you want to go, you’re establishing the most efficient way to reach your ultimate destination.
“When you build a financial plan, you’re coming up with the route you’ll take every single day to reach your end goal – maybe it’s retirement, college savings or something else,” says Schutte. “The most important thing is to stick to that path every single day. Long-term investing, time and again, has been shown to work.”
Here’s a quick case-in-point. If you had invested $10,000 in an index fund that tracked the S&P 500 on Oct. 9, 2007, you might be considered the worst market timer in recent history. That was the day the market peaked just before financial crises pushed the economy into the Great Recession. By February 2009, that investment would’ve been worth about $4,500. However, by November 2012 you would have broken even. And if you let it sit, remained patient and stuck to your guns, that investment would be worth more than $23,600 today with dividends reinvested. That works out to an annual growth rate of about 8.15 percent.
If you panicked in 2009 and decided to veer off your path and try an entirely new route to reach your destination – or changed the destination altogether – you would have missed out on significant growth. That’s why, at Northwestern Mutual, we see stocks as long-term, 10-year-plus holdings. When viewed with this perspective, a traffic jam – or a volatile stock market – shouldn’t be pushing your stress levels through the roof.
“Investors shouldn’t jump into the market with the mindset that they are buying equities for anything other than the long-term,” says Schutte. “Despite all the press and time dedicated to the near-term investing prospects, long-term investing and prudent asset allocation are what drives financial success.”
When the stock market gets rocky and headlines spell doom and gloom, Schutte suggests taking a step back and looking at the whole plan. Every single component should, in its own way, be carrying you to your destination.
This is where the objective advice and expertise of a financial professional can really shine. Sometimes, there’s a jack-knifed semi blocking all four lanes of traffic on your route to work. Google Maps may suggest a quick detour that’ll take you along a different route for a short time, but you’ll get back onto your normal route once you’re past the trouble. Financial pros can do the same for your long-term plan.
The most important decision a financial professional will help you make is determining your weighting in equities and bonds. Do you hold 50 percent bonds and 50 percent stocks? Is it an 80/20 split? This is a crucial decision that shapes the route you’ll take to your end goal. As the icing on the cake, a financial pro will further refine your equity allocation to further optimize your risk balance.
“Think of that as the tilts we may make, or the slight overweights and underweights in certain sectors of the economy or parts of the world,” says Schutte. “It’s my job to get you to your end destination, hopefully a bit faster and more comfortably.”
If you’re closer to retirement, evaluating your portfolio may be more about managing risk. Are you comfortable with your exposure to riskier assets in your holdings? Do you have an adequate mix of guaranteed and variable income streams to meet your needs as retirement approaches? Is it time to think about an annuity? Have you accumulated enough cash value in a permanent life insurance policy that you could use in the event of a down market? These are all questions worth discussing with a financial professional as your survey your plan.
STICK WITH IT
The key point is that your decisions shouldn’t be dictated by temporary noise in the stock market, but by how each investment or asset you own helps you reach your destination safely.
When you stick to a long-term, comprehensive financial plan, even dramatic gyrations in the stock market shouldn’t phase you. Sure, your stock portfolio may lose value for a time, but your emergency savings is still there. Your life insurance policy is still protecting your family and, perhaps, growing its cash value. You’ve still got the day-to-day expenses budgeted. There’s no reason to throw the plan out because the market threw a few curveballs.
“If you are a business owner and I say to you, ‘I think a recession is coming,’ do you shut down the factory completely and then wait for the uncertain event to happen? Or might you just make tweaks to possibly prepare for it?” says Schutte. “You still have costs to cover and opportunities to exploit. Just like in your portfolio, you’ll have opportunities to rebalance, collect dividends or potentially reinvest at lower prices.”
When you’ve built a long-term plan and are resolved to stick with it, the stock market’s ups and downs shouldn’t cost you a good night’s sleep.
“Through Great Depressions, Great Recessions, wars and other risks – the tenets of long-term investing have held up. We expect the coming years to prove no different,” says Schutte.
No investment strategy can guarantee a profit or protect against loss. All investments carry some level of risk including the potential loss of principal invested.