Why Investors Need to Stop Wondering Where the Market Is Headed Next
Jitters in the stock market—or any other market, for that matter—sometimes confuse investors and make them question its direction. They often ask where the market is headed next, or how the recent events will play out. Even worse, they may completely lose trust in the market and just let their life savings decline as inflation continuously takes its toll.
To say the very least, these are genuine concerns, because their life savings are often at stake and a significant move can wipe out their wealth. The broad market sell-off in 2008 and 2009 was a prime example of this, when investors, unsure about the direction of the market, took a major hit to their portfolio—and missed out on the stock market rally that began in March of 2009.
As a matter of fact, according to the findings of the Federal Reserve Bank of St. Louis, when adjusted for inflation, American households have only recovered 45% of the wealth they lost during the Great Recession. (Source: Derby, M.S., “Households Still Haven’t Rebuilt Lost Wealth,” Wall Street Journal, May 30, 2013.) They are still underwater, despite the key stock indices like the S&P 500 being up more than 100% since then.
The recent market action, which occurred after a few members of the Federal Open Market Committee (FOMC) showed concerns about the steps taken by the Federal Reserve and wanted it to reduce its size of asset purchases, has investors rattled once again. The noise is increasing, and bulls and bears are suggesting where the markets are headed next. Some are calling that the stock market has reached its top, while others suggest there’s room to run.
Looking at all this, investors must understand this one basic phenomenon: where the market is headed tomorrow, or next week, or even next year is not in their control, unless they have a significant amount of buying power—in the billions, if not more—to move the markets higher.
Forgetting all the forecasts and predictions that might be thrown at investors from the financial media, investors should focus on what they can do if things don’t work out in their favor (i.e. what is actually in their control).
One thing investors should have in place before they even start investing is a long-term plan, a reason why they are investing. It is very critical, because it can dictate what to do in certain market conditions.
For example, if investors are saving for retirement, they need to take a conservative approach. If investors saving for retirement feel stocks are turning weak, changing their portfolio’s asset allocation more towards bonds than stocks can save them from losses. Remember: stocks and bonds usually have an inverse relationship, meaning that when stocks go down in value, bond prices increase.
Long-term investing isn’t easy; bringing noise and worrying about things investors can’t control only adds to the stress and hinders decision-making. Investors saving for retirement, or for any other reason, should focus on risk management, diversification, asset allocation, and trade management, rather than worrying about the direction of the market.