The Forest and the Trees

Spring hasn’t even sprung in 2022, and we’ve already seen more than our fair share of market ups and downs. With the likelihood of interest rate hikes on the horizon and the promise of more market volatility on tap throughout the year, casual investors are almost certain to have some moments of uncertainty ahead.

There’s an understandable degree of nervousness that comes with watching the markets dip and seeing the price of assets in your portfolio go down virtually in real-time. But it’s critically important not to let an emotional reaction lead to poor decision-making. When you’re up close and personal to a couple of trees toppling over in the high winds of a market correction, it’s not always easy to remember that the overall health of the forest remains strong.

It’s so important to take a step back, appreciate the big picture, and get some long-term perspective. Because when you put short-term trends into a broader context, the situation almost always looks very different.

Consider the following eye-opening numbers: The S&P 500 has gained an average of +11.1% annually over the last 50 years. The index has been positive in 40 of those 50 years, and in 17 of the last 19 years (source: BTN Research).

While sticking it out pays dividends (literally), reactive behavior, panicky selling, and trading on margin based on short-term trends can be enormously harmful to the long-term value of your portfolio. If your attempts to play the market resulted in missing just the 30 best percentage gain days over the last 30 years (just one day a year on average), a portfolio that would have experienced a +10.6% annual gain falls to less than half of that at an average +4.4% annual gain (source: BTN Research).

On the flip side, short-term negative movement in the markets invariably gets washed out over time. For example, the S&P 500 index has been up just over half 54% of 18,118 trading days since 1950. But that number jumps to 61% of the 864 months, 67% of 288 quarters, and 74% of those 72 years (source: BTN Research).

In other words: those who can successfully ride the waves can be confident that they will eventually end up on higher ground.

Ultimately, it’s not just about patience winning out over panic, it’s the difference between trading and investing. Trading is about short-term movement, emotional swings, and high-risk moves to try and make a quick buck. Investing is all about patience, perspective, and the steady and sustained accumulation of value over time. What can get you into trouble is when you blur the line between the two and start operating in that middle ground: the gray area where your strategy seems to vary according to the whims of the market and the broader economy.

Of course, all of this is easier said than done. It isn’t always easy to execute a long-term investment strategy. And staying focused on longer time horizons can feel nerve-wracking, especially for a retiree watching their life savings go down. But because core principles and smart and strategic investing are so critical to sustain, it’s even more important to have a professional on your side. The job of a true wealth management professional isn’t just about managing money: it’s about managing expectations and emotions, helping their clients do what’s in their best interests and executing a long-term strategy with diligence and discipline.

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