The market will always go up, and it will always go down. That is just the nature of the stock market. But any time there is a downturn in the market, it is always followed by an upturn. There has never been a recession from which the market, as a whole, did not recover. The question on everyone’s mind, however, is when it will trend back upwards. Long term, it is easy to see that if you just stick out the lows you will recoup any losses. But in the short term the drops in the market can be nerve wracking. Your nerves can get the best of you, especially as you get closer to retirement. Rather than sweat the small daily movements of your portfolio, try to learn to ignore the market fluctuations.
The best way to ignore daily fluctuations is to make sure that you have a portfolio that is well suited to your risk tolerance. Creating a portfolio that acknowledges your risk tolerance is actually fairly easy to do, and in fact, most advisors will do it for you. If you want to make it even easier, simply use target date funds in your retirement accounts. The first step is to take a risk tolerance questionnaire. Then after your portfolio is built to match how much risk you want to take, and you are still nervous, then perhaps it is time to move a little more toward the conservative end of the spectrum.
Now there are times when you will not be able to handle daily fluctuations because retirement is imminent. The trick is that long before you get to this point make sure your portfolio includes at least two years worth of income needs in a cash position. Many advisors actually advise that you have 5 years worth of income needs in cash. This buffer will allow you to ride out the downturns in the market, drawing from your cash instead of selling out of your investments while they are valued low. After the market recovers you can sell some of your gains in order to replenish the cash.
You know the saying “a watched pot never boils.” What if you were watching a pot of water and waiting for it to boil, but every time it looks like the bubbles are slowing down you take the pot off the burner? The same is true for your investment portfolio. If every time you take your portfolio off the burner when the market is looking sketchy, you will just slow down your accumulation. In the end you will have less than if you had just left it alone. The best thing to do for your investments, psychologically and mathematically, is to not even look at them. In fact, in order to rebalance your account all you need to do is look at the percentages; leave the statement that shows the values alone. This way, when you retire and open that final statement, you will have a nice surprise as to how much you have actually accumulated for retirement (assuming you are saving enough in the first place).
Recently John Bogle did an interview with Morningstar. In that interview he talks about what I just mentioned. Instead of worrying about something that you have very little control over, let the market work in your favor. You focus your efforts on what you can control (earning more money and slashing unnecessary expenses) and store away as much as you can for retirement.
The market is fickle. It goes up, and it goes down, and it does not care in the slightest who makes or loses money. Instead of worrying what the market is doing every day, focus your energy on the things that matter and the things that you can influence. Not only will you have less stress, but you will notice that watching your investments doesn’t make them “boil” any faster.