Three crucial lessons for dealing with the financial markets

Estimated reading time: 5-6 minutes

The stock market offers few guarantees.

But one thing investors can count on is volatility. Volatility is the ups and downs that the stock market can bring. And although the stock market is often bumpy, zooming out shows its powerful wealth-building potential.

The trick for investors is to understand how to weather the storm, allowing them to stay invested for the long term.

Dimensional Fund Advisors recently released three crucial lessons for weathering the stock market storm – an insightful look at practical steps you can take to navigate a turbulent market.

Dimensional is a private investment firm based in Austin, Texas. Their entire investment philosophy boils down to one fundamental principle:

“An enduring belief in the power of markets.”

At TrueNorth Wealth, we often use Dimensional Funds for our clients because we also have an enduring belief in the power of markets. We believe that for our clients to achieve their investment goals, they must capture market returns and stay invested for the long term.

However, we understand that it can be difficult to stay invested in times of market volatility. So we want to share the three crucial lessons with you.

Three crucial lessons for weathering the stock market storm

1. “A recession is no reason to sell.”

Unfortunately, many investors make the mistake of letting their emotions lead them to follow the herd.

As stock prices rise, more and more investors are piling in, looking for easy money and big returns. Then, as stock prices plunge, investors pull back on the sidelines, selling lower and locking in losses. This is the opposite of what investors actually want.

Smart investors prefer to buy when prices are low and sell when prices are high.

Markets and the economy are distinct but closely related. Sometimes markets can even do well during periods of economic recession. Regardless of current market conditions, the need for a smart investment strategy remains. These strategies must be prepared to weather market turbulence on the path to creating and securing wealth. For long-term investors, your mission should always be to buy low and sell high.

Dimensional offers two interesting points to consider that relate to this mission:

  1. “Markets tend to fall before recessions and start rising sooner than the economy.”
  2. “Over the past century, U.S. stocks have averaged positive returns over one-year, three-year, and five-year periods after a steep decline.”

In other words, you cannot reap the benefits of a market rally if you sell after a market downturn. And often, recessions and downturns are followed by a period of positive stock market returns. So unless you’re lucky with the timing, selling during a downturn is likely to be counterproductive to achieving your long-term financial and investment goals.

Next, let’s discuss market timing.

2. “Time the market at your own risk.

It’s not about timing the market; it’s time to market.

If you knew the future perfectly, you could sell all of your investments at the peak of the market, hold cash during the sharp decline, and then buy back at bottom prices. Unfortunately, that’s just not possible. The market is unpredictable – big returns can come out of nowhere, and missing those big return days can cost you dearly.

For example, a recent Forbes article showed that over the past 40 years, the 10 best days (out of more than 10,000) accounted for nearly two-thirds of the total stock market return for the entire period.

And the problem is that no one knows when the best days will come.

But, as Dimensional explains, “You might think, ‘I’m going to sit around until things get a bit better.’ But by the time markets are less volatile, you’ll often have missed some of recovery.

The only guarantee that you will capture the big days of return is to stay invested and avoid market timing.

3. “Now might be a good time to re-evaluate your portfolio and your plan.”

Finally, periods of market volatility can be a great time to reassess your portfolio and plan for several reasons.

First, downturns often follow periods of high returns. And often, during periods of high returns, investors find themselves playing around with various assets. Recently, for many, this has meant buying digital assets like Bitcoin or Ethereum. For others, that meant buying Zoom, Tesla or other individual stocks to capture their big pandemic run.

But when markets crash, investors are wise to reevaluate and ask themselves:

  • Why is my money invested like this?
  • Was I following a fashion or are these investments in line with my long-term goals?
  • Was I in a portfolio that represented my actual risk tolerance?

By answering these questions, investors can better understand whether they should make changes or not.

Because falling markets are no reason to sell, you should only hold/participate in investments that match your ultimate goals. If not, we suggest you evaluate your investment philosophy.

TrueNorth Wealth is here to help.

If you are interested in working with a CFP® fiduciary professional to help define your unique investment plan, with an investment portfolio customized to meet your financial goals, then TrueNorth Wealth is here to help. Here are some of the questions we discuss with our clients:

What is your exposure?

How have your holdings withstood the market downturn?

How diverse are you?

What are the expense ratios of your holdings?

How have your accounts performed against their benchmark?

How much commission do you pay?

TrueNorth Wealth is a top wealth management firm in Utah and Idaho, with offices in Salt Lake City, Logan, St. George and Boise. At TrueNorth Wealth, we strive to help our clients build long-term wealth while maximizing their enjoyment of their money. We do this by pairing our clients with a dedicated CFP® professional supported by an incredible team.

For our team at TrueNorth, it’s about more than money. It’s about serving families across Utah and helping them achieve freedom and flexibility in their lives. To learn more or schedule a free consultation, visit our website at TrueNorth Wealth or call (801) 316-1875

Sam Watkins, CIO, CFP®, TrueNorth Wealth

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