After a volatile start to 2016, investors should be pleased to remember that investing is not a sprint, but instead it’s more like a marathon. A sprint race can be won or lost by how well runners respond to the starting gun and explode off of the blocks. Marathons, on the other hand, are probably never won or lost at the starting line.
Likewise, a rocky start to the year doesn’t necessarily harm your portfolio in the long term.
[Tweet “a rocky start to the year doesn’t necessarily harm your portfolio in the long term”]
Beginnings can be deceiving
This year, we had the worst opening week in history, with a loss of about 6% in the S&P 500. The previous worst opening week was in 2008, when there was a decline of 5.3%. That year, you may remember, ended badly. In the depths of the Great Recession, 2008 ended with a loss of almost 40%. Before that, the S&P 500’s worst first week was in 1991, which began with a 4.64% loss. But the year ended with a gain of 30.47%, according to my calculations using data from Yahoo! Finance.
So what should we make of this year’s rough start? In short, not much. Market movement for any five consecutive days, at any time of the year, provides little indication about what to expect over the next twelve months.
Since 1950, the S&P lost more than 5% over a five-day period 227 times, according to historical S&P price data from Yahoo! Finance. One year after each of the five-day losing periods, investors made up the 5% loss — and then some — 77% of the time, according to my calculations. This is another reminder that short-term market volatility is more noise than it is signal — in other words, it pays to stay invested.
Adopt a marathoner’s mindset
Investing isn’t a sprint; it’s not even a race. The purpose of investing is to achieve your long-term goals, not finish ahead of the next person.
In that way, investing is much more like a marathon. Most people running a marathon aren’t focused on coming in first – they are focusing on discipline and persistence to achieve their personal goal. The journey may be rigorous and at times grueling, but marathoners embrace the pain because they know it will only make finishing that much more rewarding. In the same way, successful investors maintain discipline even when the market drops, knowing they will eventually succeed.
With that in mind, here are a couple of tips to help you focus on the long run:
Stay committed to your investing strategy even when you face uncertainty. A downturn in the market is temporary; don’t panic and sell off shares at a loss. Over time, the only people who lose money in the stock market are the ones who sell.
Ignore the New Year fallacy. Successful investors know that starting the year off with a stumble rather than a bang is not an indicator of long-term disaster. Keeping perspective is the key to achieving your goals.
With these tips in mind, you’ll confidently navigate the twists and turns of investing and reach your financial goals.