Nobody likes to see their investments falling 20%, 30% even 50%. It’s natural for emotions to bubble up during market uncertainty. The instinct is to flee the market when it starts to plummet, just as greed prompts people to rush back in when stocks skyrocket. Both can have negative impacts on your portfolio. That’s why today I want to share some important investment principles that can help you overcome emotions in times of market turmoil.
Investment Principles #1: Market declines are part of investing
It’s no secret that over long periods of time, stocks tend to move steadily higher. But it’s also no secret stock market declines are an inevitable part of investing. History proves this.
The good news is corrections (10% or more decline), bear markets (20% or more decline) and black swan events don’t last forever.
According to data from 1954 to 2024, the S&P 500 Index falls at least 10% about once every 18 months, and 20% or more about every six years.
While past results are not predictive of results in future periods, each downturn has been followed by a recovery and, over time, a new market high.
Investment Principles: #2 Time in the market matters, not market timing…
Very few traders or investors can accurately predict short-term market moves. Moreover, investors who sit on the sidelines risk losing out on periods of meaningful profits that follow downturns.
From 1929 through 2024, every S&P 500 decline of 15% or more, has been followed by a recovery. The average return in the first year after each of these declines is 52%. Of course, past performance isn’t indicative of future performance.
Nevertheless, even missing out on just a few trading days can take a toll. For example, a hypothetical investment of $1,000 in the S&P 500 in 2014 would have grown to $2,869 by the end of 2024.
Now, if an investor missed just the 10 best trading days during that period, they would have ended up with 45% less.
Investment Principles: #3 Diversification isn’t full-proof – but it can lower your risk and volatility
A diversified portfolio doesn’t guarantee outperformance or provide assurances you’re your investments won’t decrease in value.
But it does help lower risk. By spreading investments across a variety of asset classes, investors can buffer the effects of volatility on their portfolios.
The table below gives you an idea of how asset class returns can vary from year to year.
Source: Equilibrium Invest
With diversification, you may not benefit fully – receive the maximum returns of any single investment – but you sure won’t hit the lowest lows of any single investment either.
Simply put – If you want to avoid some of the stress of downturns, diversification helps!
Investment Principles: #4 Think long-term, and you’ll be rewarded!
Is it reasonable to expect 20% returns every year?
Of course not. And if stocks have moved lower in recent weeks, you shouldn’t expect that to be the start of a long-term trend, either.
Behavioural economics tells us recent events carry an outsized influence on our perceptions and decisions. That’s why it’s always important to maintain a long-term perspective – especially when markets decline.
Although stocks rise and fall in the short term, they’ve tended to reward investors over longer periods of time. For example, the S&P 500’s average annual return over all 10-year periods from 1939 to 2024 equalled 10.94% – and that includes downturns.
So, ignore the constant stream of negativity in the news. Focus on your long-term financial goals and stay invested. If you’re looking for solid income stocks that will pay you for life, then look no further than the five stocks in my Retire Rich with Dividends report out now. Full details here on how to claim a free copy.
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