Stock Market: The Ride Of A Lifetime
If you were keeping an eye on the stock market last month, the words “roller coaster” no doubt came to mind. Up one day, down the next, back up and down again. The ride was nerve-wracking to many Millennials who may have been experiencing their first extreme market bounce.
We all know what the roller coaster feels like – your heart stops when it loops and races as it plunges, then you climb off catching your breath and laughing in relief, urging the faint of heart to try it too – unless you’re like my wife, who gets off swearing it’s the last time she’ll ever be crazy enough to do that.
But here’s the newsflash – at the exact moment you were screaming on that heart-stopping plunge, the merry-go-round hadn’t stopped its own smoother, steadier, and still enjoyable ups, downs, and arounds.
Stock Market Investments Are For The Long Haul
Think of your financial plan the same way: the value of your 401K may be careening like a roller coaster, but if you have a well-planned financial strategy, market volatility does not stop your strategy’s own smooth, steady, and rewarding progress. With a sensible financial plan in place, fluctuations in the market should have no affect on whether or not you can pay your mortgage, pay down your student debt, add the new JT song to your playlist, or even splurge on that daily pumpkin latte.
That’s because you’re investing money for the long haul: it’s money you don’t need today and won’t need for a very long time, and money you’ve only lost on paper (unless of course you sell.)
With a well-planned saving strategy, you have already budgeted and allocated what you need for:
- Your must-haves: things like rent, car payments, medical and life insurance, etc.
- Your lifestyle, which includes clothing allowance, entertainment allowance, and that pumpkin latte
- Debt repayment if you have student loans or credit card debt
- An emergency fund
- Saving for short and long term goals, things like a bigger home, going back to school, a vacation, the kids’ education, or whatever your own personal goals are
- And finally, retirement or financial independence, which is a long term goal if you are a Millennial
Volatility Vs. Risk
While each of us has our own very personal level of risk tolerance, it’s important to remember that volatility and risk are not the same. Volatility – which is simply stock prices moving up and down – is a normal part of the stock market (and can be a great opportunity to buy when the market is both up and down.) Risk, on the other hand, is how likely you are to lose it all. What’s important to remember is that volatility in a share price does not necessarily mean that that company is going to go out of business and you’re going to lose it all. Apple careened wildly in August, for instance, and they seem to be still making iPods.
It’s important to know your own risk tolerance, and how long your heart is going to stop beating when the roller coaster takes that downhill plunge. Remember when you were eight and the roller coaster ticket taker measured your height before letting you ride? He was assessing a certain kind of risk. And your mother telling you that you had to wait because you had just eaten a huge piece of pizza? She was assessing another kind of risk – the risk of you losing your lunch! A good financial advisor can help you determine your own risk tolerance so you’re prepared when things get rocky and less likely to panic and veer from your plan. A good financial advisor can also suggest when it makes sense for you to recalibrate and reallocate your investments.
Unfortunately, volatility can also serve to confirm the fear and distrust that too many Millennials feel about investing in the stock market in the first place. According to a recent CNBC story, only 26 percent of people under age 30 own stocks. That means that most Millennials are missing one of the biggest potential opportunities to contribute to their own future financial independence. Even if you can only contribute a minimal amount to a retirement plan, time and compound interest are on your side to help maximize potential earnings from even the smallest contributions.
It’s only paper until you liquidate
The bottom line: stocks go up and stocks go down and it’s not always a smooth ride, but that doesn’t mean that your day-to-day shouldn’t be smooth and steady. Get good advice, know your own goals and allocate sensibly, and think of your investments as just that – investments in the future, not the present.
Legendary investor John Bogle had this to say in a recent article in 401(k) Specialist Magazine: “Just stay the darn course. Figure out what you can afford [to save] and don’t peek. Don’t open your 401(k) statement at all until you’re ready to retire, but when you do have a cardiologist handy because you are going to be shocked by how much is in there.”
Another way of saying it is have a plan in place, stick to that plan, and enjoy the view from the merry go round.