The S&P 500 was up 5.7% in January, after a 20%+ year in 2017. But instead of enjoying this pleasant surprise, everyone seemed to be wondering if things were going too well. Market volatility is historically low. When will it snap back? The Fed is raising rates. What if this shocks the markets? Political volatility is everywhere. Won’t this volatility eventually bleed into the markets?
January ended on a down note and the first few days of February have continued that theme. All those worries seem to be coming true. What if this is the dip everyone has been waiting for? How severe will it be…5%…10%…15%…more?
The biggest obstacle to long-term success is investors’ feeling of having to “do something”. If you have an integrated financial and investment plan, then you have likely already done something. You have an asset allocation strategy that is appropriate for your situation. You were likely rebalancing throughout 2017, paring back equity exposure and taking some profits as markets continued to ride higher. Short-term market movement, whether up or down, should have no impact on your plan’s long-term success.
As volatility picks up, will investors stick to their financial plan? Having a financial plan in place renders many macro concerns moot. It encourages a long-term mindset and squashes binary betting on predictions. Trading based on ‘If this, then that’ predictions isn’t investing, it’s speculating. Humans are bad at predicting the future and even worse at predicting how we will react. We have all been expecting increased volatility and larger pullbacks than we have seen recently. In most years, the S&P 500 has a double digit pullback at some point during the year. They are the norm, not the exception. More than any other factor, investor behavior dictates long-term investor returns. Now’s the time to be on good behavior.