Tony Mariotti invests in the market and hasn't been thrilled with the recent ups and downs.
"Growth has been slow, and everyone knows it," said the 47-year-old owner of a mortgage company in Portland, Ore. "Thus, markets have been responding with volatility."
Mariotti said he can see one of two things happening in the next year — pent up demand drives economic activity and lifts markets, or markets capitulate because growth remains sluggish and investors move to the sidelines.
"My bet is the latter is more probable," Mariotti said. "So I've pulled back on my exposure to equities."
While other investors also have taken note of the volatility, not many seem to have followed suit and altered their investing. According to a recent Wells Fargo/Gallup Investor and Retirement Optimism Index, 40% of investors agreed frequent stock market volatility will become "the new, normal pattern in the years ahead," but only 4% sold stocks as a result of the volatility.
Financial experts say that's probably the right move.
"Financial markets frequently endure numerous ups and downs, but the worst thing one can do during inevitable down periods is to overreact," said Kevin Smith, executive vice president at wealth advisory group Smith, Mayer & Liddle in York, Pa. "In order to be a successful long-term investor, it's crucial to maintain a disciplined focus on the destination rather than become overly preoccupied with the journey."
Despite the fact that many investors feel this may be the "new normal," Smith said historically market downturns tend to be temporary.
"Ironically, such periodic downturns actually work to the advantage of those who contribute to their retirement accounts on a regular basis by enabling them to purchase more investment shares at depressed prices," he said. "When markets eventually recover, the ability to have purchased more shares while prices were low enables investors to earn higher returns than they otherwise would have achieved had the downturn never occurred."
Robert Johnson, president and CEO of The American College of Financial Services, said while day-to-day volatility for investors has increased, when you look at a longer time horizon, returns have not become more volatile over time.
"One of the big problems with individual investors is that they often monitor the stock market on a daily basis," Johnson said. "They don't recognize that building wealth is a long-term endeavor and focusing on day-to-day changes in value may cause many investors to become risk averse and adopt a more conservative asset allocation than they should given their goals and time horizon."Investors should adopt a long term perspective on their investment portfolio and recognize that the stock market rises and falls in value, but over the long run, stocks rise in value, Johnson added.
"There is an old saying in the stock market that says, 'you can eat well or sleep well,'" Johnson said. "Those who invest in equities can eat well in the long run. But, daily volatility can result in some sleepless nights."
While the thinking long-term is good advice, Preston McSwain, a managing partner of Fiduciary Wealth Partners, admits it can be hard for investors — who typically are more stimulated and feel more pain when they experience losses than when they experience gains."We have certainly experienced a few emotionally-charged down day's year-to-date," he said. "Just as it is almost impossible to resist slowing down and taking a look at a car wreck, it is very difficult to resist sensational headlines."
However, one must avoid taking action on those headlines.
"It is useful to take in various points of view and debate investment ideas, but keep in mind that following the investment herd often doesn't yield good results," McSwain said. "Investing should be a means to meeting your long-term objectives, not a competition. History consistently teaches us that true long-term investors are often rewarded."