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If you’re like most retirement investors, you probably spent much of the last several years ignoring the stock market. Good for you. Crazy markets are stressful.
Now you likely feel like the pendulum has swung the other way. Ignoring your investments seems like insanity. What if it goes down a lot? What if something bad happens?
Let’s hope something “bad” does happen. Crazy markets are what you want as a long-term investor. Don’t believe me? Follow along, and you’ll be convinced.
It’s all about volatility, that is, how much an investment goes up and down in price over time. Some investments are very predictable. Bonds, for instance, tend to slowly creep upward.
Stocks are harder to figure out. They can be high, then low, then high again. Over longer periods, that final resting point tends to be higher, but not at any given moment.
Other investments — foreign stocks, real estate, commodities — each have their own rhythm, their own patterns up and down.
Some of that movement is due to economic cycles. Some are due to interest rates. The availability of money, expressed as liquidity or credit, can have a strong effect, albeit one that’s hard to forecast.
Finally, investors often just move their money, sometimes illogically. They tend to chase returns, to their own detriment. Panics can occur, draining investment dollars out of otherwise perfectly good assets.
Or the opposite happens. Too many investors crowd into a small number of companies. The tech boom, for instance, or the real estate bubble, to name just two recent trends.
The bottom line is, volatility is a good thing for long-term investors. If you invest steadily across a variety of asset classes at a low cost, big moves in pricing means you get to buy more of a great investment at a lower price.
It’s impossible, of course, to predict when you will have that opportunity. So it’s important to remain invested and to rebalance periodically.
Rebalancing helps you to make unemotional decisions about what to buy and when, all the while remaining invested. If stocks take off, you sell gains to buy other parts of your portfolio.
If bonds zoom higher and stocks tank, do the reverse. If everything declines, you stay invested (no need to lock in losses by selling) and wait for a reversal. It will come in time.
If you are saving, or if you have incoming cash from dividends and bond interest, that cash is put to work buying assets as they fall.
Programmatically selling high and buying low is the strategy, and rebalancing makes it happen like clockwork. You don’t have to guess what’s coming next, nor do you pay a penalty for being wrong.
Critics might say, “Well, you also don’t get the excess profits for being right!” And that’s true. The problem is, almost nobody can consistently get the markets right and a lot of people have absolutely mastered the art of getting it wrong.
Do that often enough and you’ll end up broke. Get your emotions out of the way and stick to a plan, though, and you can’t help by compound your way to retirement.
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