Calculating Risk and Investing Wisely

Ignore Short-Term Market Events

Investing in the stock market is an excellent way to build wealth over time. However, the stock market can be volatile. Short-term market events, like economic recessions, pandemics, or geopolitical tensions, can cause significant fluctuations in stock prices.

Here’s why you should ignore short-term market events and focus on long-term investment strategies.

The failure of Silicon Valley Bank

On March 10, 2023, Silicon Valley Bank (SVB) failed. This event was the most significant US bank failure since the Global Financial Crisis in 2008. SVB was shut down after its investments significantly decreased in value, and its depositors withdrew large amounts of money.

The failure of SVB roiled the markets, creating uncertainty about how small and mid-sized bank stocks – and the broader market -- would fare.   The financial media went into overdrive, counseling investors about the “banking crisis” and its ramifications.

Ultimately, the Federal Reserve Bank and other government agencies backed all deposits at SVB and another failed bank after their collapses set off more financial tremors in the US and Europe.  

This intervention calmed market jitters.

The stock market is resilient

Despite the uncertainty, the stock market has shown remarkable resilience over time.

There have been many short-term crises that impacted the market. Some of the  most notable ones are:

1. The Black Monday stock market crash of October 19, 1987

2. The Dot-com bubble burst of 2000-2002

3. The Global Financial Crisis of 2007-2009

4. The COVID-19 pandemic of 2020

All these crises have had a significant impact on the global economy and the financial markets, resulting in sharp declines. However, the market eventually recovered these losses and regained an upward trajectory.

Over the past half-century, the market recovered from severe declines caused by a crisis “in no more than a couple of months,” although there have been exceptions lasting a year or more.

The consequences of “fleeing to safety”

Reacting to short-term market events often results in “fleeing to safety” by selling stocks and investing in cash or other “defensive” investments and then re-entering the market when you perceive it has “settled down.”

Investors who engage in this activity are frequently punished by diminished returns.

Consider this data.

An investor who remained fully invested from January 1 1995-September 30, 2022, earned a compound annual growth rate of 7.7%.  Those returns were reduced to 5.9% if only the five best-performing days were missed and to a loss of -1.8% if the 50 best-performing days were missed.

According to Charles Schwab, timing the market perfectly is “nearly impossible,” The “best strategy” is not to try it.

Better choices

Instead of reacting emotionally to short-term market swings, focus on matters within your control.

Diversification

If you have a broadly diversified portfolio, the impact of market declines will likely be mitigated because of your broad exposure to different asset classes in many different geographic areas.

While diversification doesn’t prevent short-term losses, it can “smooth the ride through a tumultuous market.”

Bargain stocks

Legendary investor Warren Buffet was famously quoted saying, “Be greedy when others are fearful, and fearful when others are greedy.”

While there are no guarantees, a market decline can be an opportunity to invest in the stock market at bargain prices using low-cost, broadly diversified index funds or Exchange-traded funds.

Focus on your investment plan

Don’t equate action with progress.  Sometimes, doing nothing is the optimal reaction to a market decline.

Stay focused on your long-term investment plan.

The longer you keep your money invested, the more it can grow.

Long-term investing typically requires less time and effort in monitoring the markets and making trades, which can reduce stress and volatility in your portfolio.

Finally, by sticking to a consistent, long-term investment plan, you may be able to build a nest egg that can help support you during your retirement years.

Summary

Reacting to short-term market events can impair your long-term returns. If you can’t deal with market volatility, you shouldn’t have exposure to stocks.

Ignoring short-term market events
is important because markets are unpredictable and subject to sudden changes.

Short-term swings in the market are often influenced by factors like news events or market sentiment rather than fundamental changes in the underlying companies being traded.

Focusing too much on these short-term events can lead to emotional decision-making, which may have a negative impact on long-term investment performance.

Instead, focus on the more significant economic and business trends likely to drive long-term growth and make investment decisions based on these factors.

When you are tempted to react emotionally to the news du jour, remember this quote from Vanguard founder John Bogle: "Don't pay a lot of attention to the volatility in the marketplace. All these noises and jumping up and down along the way are really just emotions that confuse you."

At Daner Wealth, we provide comprehensive financial advice and stay focused on planning for the long term.

Focusing too much on these short-term events can lead to emotional decision-making, which may have a negative impact on long-term investment performance.

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