Given recent market volatility, now seems like a great time to reshare a post to remind everyone what not to do with their portfolio – regardless of the current market condition.
Since the last time we shared these ideas on June 29, 2018, the S&P 500 is up approximately 61% through today (price, point to point). In the 5 calendar years since, the S&P 500 has experienced the following intra-year declines and calendar year returns:
- 2018 – Down 20% at the low, down 6% for the year
- 2019 – Down 7% at the low, up 29% for the year
- 2020 – Down 34% at the low, up 16% for the year
- 2021 – Down 5% at the low, up 27% for the year
- 2022 – To date, down 12% at the low, down 8.15% for the year
The point is, on average the stock market, represented in this post by the S&P 500, has intra-year declines of approximately 14% every year dating back to 1980. In 9 out of the 41 years through 2021, the S&P 500 went negative and stayed negative for the entire year. 78% of the time, the market was down at some point and finished to the positive. We’ll see what 2022 holds. In the meantime, to help mitigate creating a true loss, you’ll want to avoid the following mistakes which can’t easily be erased as the picture above may suggest:
- Market Timing
- It’s been proven countless times NOT to be a sounds investment strategy. Even if you get out of the market at the right time, you have to be right a second time – knowing when to get back in before the price rebounds.
- Investing Without a Plan
- Without a strategy (in writing) around when you’ll retire, how much you’ll spend in retirement, and how much you are going to save between now and then, you are rudderless and more likely to make poor investment decisions.
- Making Investment Decisions Based On The News
- Remind yourself how the media industry is paid. They need viewers to generate advertising revenue. Unfortunately, viewership is often achieved by scaring the consumer into watching more by tapping into our “fight or flight” lizard brains. There is also a lot of time to fill in a typical programing day which means many of the talking points are recycled endlessly, creating a false sense of urgency.
- Emotional Attachment
- It’s difficult for investors to sell losers and winners. We hold onto losers waiting for the optimal time to get out. We also hold onto winners thinking the advanced forward will continue forever. Successful investors have a framework for making portfolio decisions which helps mitigate emotional attachment.
- Building a collection of investments
- Many times we review portfolios that look more like a collection of investments rather than a cohesive strategy with purpose. Think of portfolio management like baking a cake. You need all the right ingredients, measured precisely, to produce something that will be enjoyable.
Avoid these five mistakes and you’ll be in a much better position to achieve long term success.