Jonathan Murray: Keeping perspective in volatile markets
Investing
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- Jonathan Murray, UBS Financial Services
The recent increase in market volatility and equity market declines has unnerved many investors, particularly after the release of relatively weak U.S. retail sales data and the volatility index rising to 25.5, the highest level since June 2012.
However, it is important to keep in mind that the volatility index has been higher than its current level five times since December 2012. Even more importantly, market corrections and recoveries are frequent and a normal part of investing.
So what do you need to know as an investor? Below are some top investment tips to keep in mind:
Remember WHY you're investing
For most of us, it's for a long-term goal, like saving for our own retirement, paying for our children's college, or buying a second home. If that's the case, a near term market decline is irrelevant. Stick to your financial plan. Today's market decline will be a distant memory five, 10, 15 years from now.
Market corrections are perfectly normal
In fact, in the last ten years there have been several market corrections of 5 percent or more. Each time the markets have declined and subsequently rebounded. Picture a beach ball in the swimming pool — you can push it underwater, but it always bounces back up. I ask this question of the investment classes I teach, "What percentage of bear markets have come back to make all-time highs?" The answer has historically been 100 percent.
Steady the sail
This next tip makes sense, intuitively, but if you allow your emotions to get involved, you can lose sight of the logic. When stock prices decline, many investors look for bargains because a sell-off or a market correction is often driven by other investors' emotions. In other words, if you want to buy stocks, you should wait for the price to go down, not up, before buying them, right? Why in the world would you want to buy something after it's already gone up 100 percent? Yet, that's what many investors are more comfortable doing. Go figure.
Be an investor, not a spectator
During bear markets, as Warren Buffett says, "Stocks are returned to their rightful owners." As investors, we seek to own high quality companies for the long haul, not to trade them back and forth. Taxes, commissions, market whipsaws — leave those to the speculators. To put it in perspective, how many traders/speculators are on the Forbes 400 list?
Use market volatility as an entry point for long-term investments
Bear markets may present an opportunity to invest in stocks that may have been overvalued. Take advantage of those opportunities. Have you finished investing your last $1? If you're not finished investing yet, why would you want prices to be anything but lower? The stock market is the only market where, when there's a sale, people run in the opposite direction. Bear markets can be a gift for the long term, disciplined investor. As the old Wall Street adage says, the key to success is to "buy low, sell high."
And I say, "This is what buying low feels like."
Most importantly, stay true to your financial plan and don't let short-term volatility cause you to abandon long-term goals.
Jonathan Murray is managing director of wealth management at UBS Financial Services Inc. in Hunt Valley. He can be reached at Jonathan.Murray@ubs.com.
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