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By Clay Zachry, CFP®
Have you ever started something only to stop before you’ve finished it? Maybe it was an exercise routine, a diet, or a book. Whatever it was, there was a reason you decided to start it. So why did you stop?
Investors often experience this same issue when volatility returns to the markets after long periods of growth. They have a plan to ride out the ups and downs of the market, but when the downs come, the investor quickly sells their positions and heads for the exit. They decide they will wait “for things to get better” before getting back into the market.
While this might feel like the right thing to do at the time, there is a real danger to your long term financial goals. It is important not to give up long‐term gains for temporary short‐term stability. Not staying invested and choosing to pull out of markets until they’re less volatile can mean the loss of tens of thousands of dollars (or more). The following chart illustrates this risk:
Market volatility can be unnerving, but it is important to keep in mind that volatility is the norm, not the exception. It is a sign that the markets are working as they should be. The chart below illustrates that 5% pullbacks are a very common occurrence and should be expected, not feared. What about the dreaded “correction”, or 10% decline? History shows this is likely to occur at least once per year.
Just like exercise or a new diet, investing only works if you maintain your discipline. It may be tempting to give into your short term emotion, but do not lose sight of your long‐term financial plan. The longer the time frame, the chances of realizing negative returns diminish.