The World has Changed
The return expectations we have for our investments aren’t what they used to be. Continued market ups and downs have pushed many of us out of the market and into cash. I have first-hand knowledge, both personally and professionally, that sitting in cash on the side-lines is one of the best ways for an investor to go nowhere fast. We miss opportunities by staying out of the market. If we take a closer look at our own behaviors, understanding what drives us personally, or in some cases uncovering the things that may derail us, and using this knowledge to drive our goals, we may be able to ensure we are doing everything we can to meet our goals.
Market Realist – Staying out of the markets can mean missed opportunities. The previous graph shows the effects of being out of the market during strong market rallies. Looking at the S&P 500 (SPY) from 1996 to 2005, you can see that missing the top ten market days reduced returns by more than half.
The markets have been performing exceptionally this year. The S&P 500 (IVV) reached its highest-ever close of 2,011.36 on September 18, 2014. The Dow Jones Industrial Average (DIA) also reached a record-high close of 17,265.99 on September 18, 2014. The NASDAQ (QQQ), though trading lower than its lifetime highs experienced before the technology bubble burst, is trading at 14-year highs.
Though volatility (VXX) is on an uptrend, it tends to come in spikes. This tendency means that the market swings in short bursts either up or down. Investors tend to cash out of the markets in times of high volatility, missing any opportunities a strong bounce-back presents.
Read on to the next part of this series to see why you need to be self-aware as an investor.