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Time in the Market, Not Timing the Market

With the markets still chugging along, many of us that remember the Great Recession of 2008 are wondering: when's it going to end?

Spoiler alert: no one knows.

While no one is certain about the future (or they're not telling), we do know that the economy generally moves in cycles. Rather than fearing the next downturn, below I provide three thoughts on dealing with with market uncertainty:

1. Don't time the market

Far more people have lost money than made it trying to time the market. And winning consistently is almost impossible. Instead, align your portfolio with your risk tolerance, goals, and time horizon. Money and investments are just tools so use the right one. If you're saving for a home down payment that you plan on making in the next few years, it may need to be in more conservative investments than say your retirement account which you won't need for quite some time. If you're getting closer to retirement, check to ensure your portfolio mix is inline with your risk tolerance; if not monitored, over the years your investment mix can become misaligned. Stick to your plan and ignore the noise.

2. Time is your friend

On October 9, 2007, the S&P 500, a leading benchmark of the US stock market, closed at 1565.15, a then record high. We know what happened next: while bouncing around, the market slid to a low of 676.53 on March 9, 2009. A lot occured at the same time but no doubt this was a very scary time as it was one of the worst downturns in history. I was in graduate school as these events unfolded and my colleagues and I wondered if we'd be able to get jobs once we graduated. However, in approximately 5 years, the market recovered. The chart below shows the slide and ensuing recovery. For those that stuck to their plan, didn't panic sell, and even made investments along the way, they captured the recovery. Those that pulled out may have missed at least some of the benefit of the recovery. Discipline over time is rewarded.

S&P 500 Chart - Sept. 2007 - Oct. 2013
S&P 500 Chart - Sept. 2007 - Oct. 2013

3. Be truly diversified

Diversification is owning a wide variety of investments within your portfolio. It helps reduce the risk of any one investment having a major effect on your portfolio. While mutual funds and exchange-traded funds (ETFs) are great ways to build a diversified portfolio, they do not automatically guarantee diversification. For example, the Vanguard S&P 500 ETF (VOO) and iShares S&P 500 Index (WFSPX) are similar funds that track the S&P 500. If you own both of these funds under the guise that owning two funds is better than one, you'd be mistaken. Additionally, take a look to see if you portfolio has any large concentrations in any individual investments. Perhaps you have a large holding in your company's stock or you received shares as a gift or inheritance. How do those investments fit into your overall strategy? Are they adding undue risk to your portfolio?

Rather than focusing on what the market is doing, focus on what you can control - your behavior. We can look for ways to increase our income, increase our savings and investing rates, reducing debt and risk, shore up our emergency funds, and adjust our portfolios to meet our goals. Align your behavior with what you can control, tune out the noise, have a little faith in your plan, and stay on trail.

Disclaimer: Nothing on this blog should be considered advice, or recommendations. Any investments mentioned are used for example only and should not be considered a recommendation. If you have questions pertaining to your individual situation you should consult your financial, tax, and/or legal advisor.


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