This past week, the stock market witnessed a whirlwind of activity.
On Monday, February 5th, the Dow Jones plummeted by 1,175 points, only to rebound by 568 points the following day. This came after the Dow Jones had celebrated surpassing the 26,000 mark for the first time, riding the high from its 2017 stability.
For those who determine their investment moves based on daily market movements, this week might have been particularly nerve-wracking.
My perspective on investing is rooted in a long-term vision. Hence, these market fluctuations, to me, are just momentary blips. Historical patterns reassure that markets bounce back. The key is to be patient and stay committed to your investment strategy.
Market Volatility in Perspective
The week’s news cycles have been dominated by dramatic accounts of the market’s ebbs and flows.
Of course, it’s distressing to watch significant sums vanish from your retirement savings, such as a 401(k). And witnessing the market shed over 1000 points certainly raises eyebrows.
However, an age-old story about J.P. Morgan comes to mind. When a young man once asked him about the future direction of the stock market, Morgan reportedly responded, “My belief is that the market will always fluctuate.”
When one zooms out and reviews the market’s long-term trajectory, it becomes evident that such highs and lows are part and parcel of its journey. Recognizing this, long-term investors might even view these downturns as opportunities to buy stocks at a bargain.
Historical Resilience of the Stock Market
A century-long analysis of the Dow Jones Industrial Average showcases a clear trend. Despite intermittent setbacks, the value of stocks generally appreciates over time.
While the market did see a historic 1000+ point dip this week, it’s crucial to contextualize this. It merely took the market back to where it stood in December 2017. In terms of market proportion, this drop was around 4%.
Predicting the exact future movement of the market is challenging. But a longer investment horizon enhances the likelihood of witnessing meaningful growth. History remains a reassuring ally in this.
Investing Wisely: A Marathon, Not a Sprint
The market’s downturn might feel disheartening, but its impact varies depending on individual circumstances and outlooks.
For someone nearing retirement, this week’s events could be more unsettling compared to someone with three decades of investment ahead.
The investment strategy should evolve based on the time frame. Younger investors with ample time ahead can afford a stock-heavy portfolio. Conversely, as one nears retirement, it’s prudent to lean towards bonds and other low-risk assets.
The Power of Index Funds
One of the most effective strategies for long-term gains? Investing in diversified, low-cost index funds.
Research from the Journal of Indexes has highlighted that portfolios centered around index funds generally outpace those with actively managed assets. The compounded effect of investing in multiple index funds amplifies these positive outcomes.
Jack Bogle, a pioneer in the index fund domain, propounded eight cardinal rules for investing. They emphasize the importance of cost efficiency, longevity, diversification, and simplicity.
Kickstarting Your Investment Journey
Wondering how to embark on a fruitful investment journey? Here are two suggestions:
- Embrace the 3-Fund Portfolio with Vanguard: Vanguard, co-founded by Jack Bogle, is synonymous with affordable index fund investing. A three-fund portfolio, comprising domestic stocks, international stocks, and bonds, offers a holistic investment approach. For instance, one could consider:
- Vanguard Total Stock Market Index Fund (VTSMX)
- Vanguard Total International Stock Index Fund (VGTSX)
- Vanguard Total Bond Market Fund (VBMFX)
- Opt for an Automated Investment Platform: Platforms like Betterment, Wealthfront, Axos Invest, and M1 Finance simplify the investment process. They curate and manage diversified ETF index fund portfolios based on your preferences. M1 Finance and WiseBanyan are notable for their competitive fee structures.
Staying Resilient Amid Market Shocks
For long-term investors, transient market gyrations should not sway their core strategy.
It might even be an opportunity to acquire more stock. As for myself, I remain unflinching, trusting my original strategy, and hoping for a market resurgence.
How are you navigating the recent market volatility? How does it impact your financial plans?
