News and Investing: Stay Cool

Almost any global happening can spur you to sell investment positions or put off investing new dollars. Yet no spooky event affected markets during the last several months. Sounds great – and it is, if you keep a level head in both bad times and good.

While we all remain concerned about the terrorist groups such as ISIS, saber-ratting from North Korea and Iran and seemingly endless fighting in Afghanistan, we haven’t recently suffered any negative political event to send the stock market into a tailspin. The latest international news with potential investing implications is America’s increased cooperation with Cuba, potentially a positive.

Global economic situations can also intensify volatility in the stock market. International markets are enjoying investment good news thus far in 2015, with Europe, Asia and emerging markets outperforming U.S. stocks.

Domestic social unrest can move markets. Stories of potential racism and excessive police violence are shocking and unfortunate but not usually detrimental to investment markets.

Relatively few natural disasters such as hurricanes, earthquakes or tornados damaged a big geographic area or the nation as a whole. In fact, the Weather Channel announced that the tornado count is 59% below average year-to-date. Blizzards in the Northeast earlier this year only nominally influenced Wall Street’s direction.

Even the U.S. economy offers little that’s particularly frightening. You must look all the way back in October, when the Federal Reserve announced the ending of quantitative easing (QE) – its bond-buying program, meant to keep interest rates low – for even a hint of disturbing news (which ultimately also didn’t affect the market at all). Concerns about rising interest rates in the wake of QE are old and familiar news; investors also seem less convinced these days that higher rates might stall economic growth.

Meanwhile, unemployment continues to decline.

In the stock market itself, the Standard & Poor’s 500 now boasts a positive return for every year since 2008. Aside from a dip last fall, the index hasn’t seen even a temporary pullback of more than some 7% since 2011, even though the market at large averages a minus-10% correction about annually.

Last year’s biggest worry was that small-capitalization and international stocks didn’t do as well as large caps. This meant that most diversified portfolios with these holdings lagged behind large indexes such as the S&P 500 and Dow Jones Industrial Average.

Your takeaways:

  • The stock market is not always such a smooth ride.
  • Any investor can fall for recency bias, the bad habit of assuming that recent financial trends will continue well.
  • Trends are dangerous illusions when it comes to investing.

Don’t let this unusual quiet investment atmosphere make you more susceptible to freak out when the inevitable and brief instability comes along. Remind yourself that you invest for long-term results and that volatility is as short-term as it is headline-grabbing.

As advisor Carl Richards points out in his new book The One-Page Financial Plan, no skydiver tries to figure out how a parachute works after jumping out of a plane. Sooner or later, bad news will rock the market. Restrain your panic, and your long-term investment results are likely to be anything but bad news.

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Lon Jefferies, CFP, MBA, is an investment advisor with the fee-only financial planning firm Net Worth Advisory Group in Sandy, Utah. You can find Lon on Twitter, LinkedIn and Google+. Contact him at (801) 566-0740 or [email protected].

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