It’s been a rough ride lately in the U.S. markets. As I write this, the S&P 500 index fell about 5.8 percent during a short trading week, leaving investors feeling jittery. Part of the yield curve inverted, which means that short term interest rates are higher than some longer term interest rates. Is the powerful bull market we’ve had since the Great Recession beginning to wind down? If so, what should you do to prepare?
Whether this is normal volatility in a market that has room to grow or the beginning of the next economic downturn, recent events are a reminder that financial markets don’t go up in a straight line. Eventually, we’re going to have a bear market because that’s how the business cycle works. Over my adult lifetime, I’ve seen plenty of market bubbles and busts. Consider your worry about the market a sign that it’s time for a check-in on your investments
1. Measure returns from where you started, not from the highest balance.
It’s a natural tendency to look at the highest number on your 401(k) or brokerage account statement and then feel like you lost money when the statement balance is subsequently lower. You feel like you were counting on that sum, and now it’s not there anymore. Unless you sold at the exact moment when your balance was the highest, however, you wouldn’t have realized the gain, so it’s not very helpful to measure that way.
A more realistic approach is to measure your success vs. your goals. Has your account balance grown since you originally invested the money? Did you require a certain average annual rate of return or that your balance grow by a certain amount by a certain date to fund your goal?
What’s your progress so far? Are you trying to match or beat a benchmark using one or more market indices? (See Why Is An Index Important In Investing?) If you’re saving for a house down payment or an early retirement, and you’re still on track to meet that goal, that’s what matters – not whether you’re down 10 percent from the all time high.