Stock market traders rarely beat out savers
If you've been diligently saving for the future by investing over the years and found yourself selling stocks in the first two weeks of August, you're not a saver but a trader. And traders don't get higher returns than savers.
Study after study conclude that the longer an investment is held, the more likely it will have a positive return. A portfolio of stocks bought and sold within one year can go up or down by as much as 40 percent on average. If the same portfolio is held for 10 years, it rarely will lose money. So you have to ask yourself: Am I in it for the long term or just a trader?
Hopefully, you're in it for the long term as you work toward retirement. If you are, then the recent stock correction should be of no concern to you. It's just another bump in the road toward retirement that is as predictable as the weather. Some summers will be stormier and some cooler, but in the end, you can always expect what the weather will be in summer. You are not going to move out of a city just because a tornado hit one summer. So why move out of stocks when it gets rough?
It's a difficult task to remain confident when disaster strikes. One way to help is to write down your investment goals so you have a plan to refer to when you feel tempted by fear. A certified financial planner can analyze your needs and goals. The plan should include how much risk you should take and what you expect to gain from your investments.
For example, let's say you need to invest in mostly stocks because of the higher potential returns. If you put 80 percent of your portfolio in stocks, you can expect an average annual return of 5 to 10 percent over the years. The more stocks in your portfolio, the more risk and the more potential for gain in the long term while you go through short-term losses.
Stay focused on those expected annual returns. This helps you frame your portfolio as a long-term project and accept the drops that come while investing for the long term. And it helps you avoid mistiming the market by selling at the bottoms.
The two biggest movers of stocks are fear and greed. If you can learn to invest without those emotions, by maintaining a consistent savings plan, you will most likely come out ahead of the traders.