The markets have been volatile for the last week or so. Inflation, Ukraine, Omicron lots of factors go into this. Let me say clearly that I am a finance professional with over 30 years of experience. I am not a financial advisor and anything you see here is my opinion only. Have I seen something like this before? Yes, I have. Markets have crashed many times in the last 30 years. While I wasn’t investing at the time I am old enough to remember inflation in the 70’s. Many of you are seeing inflation for the first time and are shocked at its impact.
First let me say that I think the markets have been artificially inflated for decades now due to U.S. monetary policy. Keeping the fed rate so low for so long has forced many investors into the market that wouldn’t have necessarily gone in before. Getting .25 of a % of interest at a bank is a killer, even the most cautious investors can’t stomach that kind of return. So right off the bat I think there is a 10-15% inflation of the market (approx. 3-4K points in the dow) due to fed policy, likely more.
Now it’s also true that over the last few decades many companies have created immense wealth and broadened their services. The market isn’t a complete illusion, these companies have value based on market share and branding. So how do you navigate the stock market roller coaster?
I know, not the complex detailed answer you wanted but the key to wealth building is consistent investing. If you jump every time there is a dip in the market you will not make a lot of money. Statistically the market normally returns approx. 8% a year. This link shows you the statistical return break down for 147 years…. Yes, we have that much data.
If you want the simple facts here it is: 101 years shows a positive return, 46 years showed a negative return. So statistically the chances of you suffering through concurrent negative years is low, the market usually bounced back. Additionally, if you continued to invest in those down years purchasing your assets at a lower price you balance out the actual cost of your portfolio to you when purchasing in high years.
The trick has been and always will be, when you need to convert the assets to usable currencies (when you sell). If you need to sell now, you are most likely going to take a loss. Now only you know when your sell date is. Mine is approx. 10 years. In the next 10 years I will begin to take my gains with sell offs and move my investments into more principal friendly investments. The older you get the less window you have for the sell, always be mindful of when you will need the money.
So you don’t do anything unless you are at a point you need the money. Otherwise stick with your investment plan. The likelihood of a multiyear down cycle is very low (it is possible). My instinct tells me 2022 is going to be a highly volatile year and it will not be for the faint of heart for investors. Many people can’t take the risk, it’s too stressful. I completely understand. For me, this is a buy opportunity and I am happy to keep accumulating assets at a lower price now to balance out the assets I have that were purchased in peak markets.
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