This is one of those interesting post titles that is both true and a myth, depending on who is reading it. Hence the danger of mass financial advice directed at the “average person”.
As a fan of Vanguard and it’s founder, John Bogle, I want to share their recent timely article on market volatility. And I also must add my caveat about rules of thumb and averages. Here’s the link to their three “Rules”, which I’ll summarize and supplement below:
Rule #1- Recognize that volatility and periodic corrections are common in equity markets. You’d have to be Rip VanWinkle to not be aware of this rule. Most of us are painfully recognizant of the roller coaster ride. And I would add bond markets too because as we saw in 2009 they are no longer the safe hedge against equity risk. Hell, any market these days, whether it’s real estate or precious metals, is volatile because of the craziness with which investors are chasing returns.
Rule #2- Tune out the noise and remove emotion from investing. I’m on board with this. The two most common- and destructive -investor motivators are (1)Fear and (2)Greed. A realistic, well conceived Cash Flow Plan should be primary. As an adviser who constantly seeks to understand what has happened and will happen in the markets, I’m weary of all the retroactive blather from my colleagues claiming to explain the past while failing to predict the future. So yes, tune out the noise.
But I also believe emotions must be taken into account. Life is more than a math problem. It is more than just getting as much as you can. It is more than a fancy pie chart. A good adviser will use a process to ferret out and give shape to clients’ true feelings about their situation and the future and then build a plan accordingly. The goal should be to feel safer and happier!
Rule #3- Make volatility work for you. This rule appears to be directed at younger investors who have time to dollar cost average into the market. At least it had better be, because for the retiree drawing down assets, volatility is a retirement killer due to sequence of returns risk. To apply this rule to retirees it should be stated as “Keep volatility from destroying you”. Here’s the difference and how to avoid getting stung by volatility in both cases:
Your Constructive Comments are Welcome!