While the market had its moments in 2015, overall it was relatively stable. But that has done little to calm nerves among the American public when it comes to investing. The volatility that reared its ugly head last year, continuing into this one, has deflated investor confidence.
More than a third of Americans — 37% — said “fear of market uncertainty” would prevent them from investing today if they had extra cash available, just slightly lower than the 40% that said the same thing in 2014, according to a recent survey by insurance provider Allianz Life.
“While 2015 may have been relatively stable when looked at over the entire year — the major market averages were virtually unchanged — there was a great deal of daily volatility,” said Robert Johnson, president and CEO of The American College of Financial Services. “Unfortunately, many investors take a very short-term view of the market and are unnerved when markets are volatile like they have been the past few days.”
Johnson said investors can succumb to confirmation bias — another behavioral finance concept — and seek out information that confirms their preconceptions.
“If one believes that markets are poised for a fall, then one is drawn to headlines like ‘Marc Faber’s Forecast for the U.S. Market is Frightening,’ and aren’t drawn to headlines like ‘Jeremy Siegel: S&P Will See 10% Upside by Year-End,’” Johnson added.
Andrew Aran, a partner at Regency Wealth Management, said investors need to keep in mind that it is in the very nature of stock markets to fluctuate.
“Volatility needs to be accepted, and investments need to reflect investor’s individual risk tolerance and time horizon,” Aran said. “Even with inflation at low levels, holding cash beyond some safety net level during retirement erodes purchasing power and may eventually crimp one’s lifestyle.”
Aran reminded with people living longer, they need their long-term investments at work.
“The average S&P company’s dividend is 2.25% or so, and long-term economic growth is reflected in earnings growth and stock market values,” Aran said. “It may help retirees to take a risk analysis test to help them determine what level of market volatility they can withstand.”
The fear of instability in the markets also continues to affect people’s retirement plans, with 62% of those responding agreeing they assume the market will continue to be uncertain when they assess their retirement strategy.
Joseph Carpenito, a financial advisor with Raymond James Financial Services, said there are strategies for investing in times of uncertainty if you believe the market to be unstable.
One such strategy is dollar-cost averaging, where a person chooses to invest his available cash on hand in equal increments over time, instead of investing it all at once.
“For example, the nervous investor with $12,000 in cash today, may not want to invest it all into the market at once,” Carpenito said. “Instead, break it up into equal increments and invest over a time period you feel comfortable with. In this scenario, investing $1,000 a month for all 12 months of 2016 would allow you to dollar cost average.”
However, Carpenito cautions to not try to time the market.
“If you stick to this method all the way through, it will help eliminate the ‘emotion’ from your investing,” he said.
Another strategy in times of volatility is to upgrade your portfolio, Carpenito said. In this strategy, an investor can look for another company in the same sector in which he already has an investment. The investor may feel the second choice a better option — therefore he is "upgrading" his portfolio and not "changing” his portfolio's overall allocation. The hope is the new company the investor chooses will recover from a down market faster or better.
“The alternative is that both companies go back up 5% in an equal time frame,” Carpenito said. “Well, if Company B is truly a better ‘quality’ company than Company A, you have recovered the same initial loss but now own a higher quality company in its place. This is still an upgrade.”