Investors don’t mind risk until it creates red numbers on their monthly statements. Knowing how much loss you can tolerate, before the inevitable market dip, is the key to long-term investing success. Volatility is never enjoyable when it takes us south. The secret to surviving the days of 200 point drops in the Dow is to be prepared before it happens…because it will happen.
Over the past 20 years, the S&P 500 has generated an average annual return of over 8%*, but not without a lot of heartache and pain along the way. The tech stock implosion, housing bubble, and financial crisis all left their marks. Yet, those who had the endurance to hang in there have seen their portfolios continue an upward trajectory.
Stop worrying about market volatility, what will happen with the election, interest rates, or any of the endless concerns we, as investors, bear and allow to weigh on our decision-making. Accept the fact that risk and reward are related. Determine how much return you need to meet your long-term financial planning goals, and don’t take more risk than is necessary to achieve those goals. Do you know when you want to achieve financial independence? Do you know what financial independence even looks like? Have you put a number to how much cash flow will be needed to retire and maintain your desired lifestyle, with some added margin in case you underestimate? That takes some thought and preparation and, ultimately, resolve to stay the course. Sounds cliche-ish, but it’s the truth. Stay diversified.
*Source data from Dimensional Fund Advisors, LP
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