In the last couple of months investors have focused primarily on market volatility and the impact on their net worth. In 2018 there was another important news story you may have missed which could have had more of an impact on your day-to-day life. Prognosticators predicted there might be a global coffee shortage and by the year 2020 there may be a global shortage of chocolate.
Like some, I consider both coffee and chocolate essential to mental well-being. So we need to be prepared. The predicted shortages were due to increased demand from developing countries and a decrease in farming (supply). In an effort to reverse the decline in farming, major companies like Mars, Hershey's and Mondeleze spent almost $1 billion for research and other programs to support sustainable farming practices. So far, crisis averted!
Unlike the chocolate companies, most investors focus on the one element we can't control—rate of return. People who try to predict short-term shifts in the market usually are wrong. Often we forget investing involves risk, including the loss of principal. At all times, it's best to have a long-term perspective. If you follow four basic rules, you can keep your plan on track.
Keep your cool. Invest, don't speculate. Impulsive investment decisions rarely work to your advantage. It is important not to panic when financial markets are volatile. Take the time to evaluate your holdings with your financial advisor. Remember, fluctuating markets may create those elusive bargains.
Put dollar-cost averaging to work for you. Discipline yourself to invest a regular amount each month or quarter. This way, you eliminate the guesswork of trying to figure out the best time to invest. This strategy, doesn't guarantee a profit, or that account values will not decline. But it can help reduce your overall risk. That's because you will buy more shares when the price is declining. By systematically investing you can take full advantage of market fluctuations. Over time, if the share value rises, the value of all your shares will rise.
Stay Focused. Don't let short-term volatility distract you; retain a long-term perspective. We can't know what the returns on an investment will be over time or what the rate of return will be from year to year. We do know however, that regardless of the average annual rate of return, the longer we earn a specific rate of return, the more money we will have. Time is money. Retain a long-term perspective and remember the greatest risk we face is not being caught in a falling market, but not participating when the market comes back.
Review your goals. Now is a great time for a portfolio check-up. Get together with your financial advisor to review your short-and long-term goals. Make sure your portfolio accurately reflects your financial goals, time horizon and tolerance for risk.
The biggest risk investor's face right now is losing focus on their long-term investment objectives. Don't let fear drive your investment decisions. Have a nice piece of chocolate, a great cup of coffee and remember, you need to be in the markets to take advantage of a rally that may follow. An old Swedish proverb says "In Calm Waters, Every Ship Has a Good Captain". Given the recent volatility of the last year I would like to add another: "When things get choppy a good captain is invaluable". If you need a good captain, look for a Certified Financial Planner who should have the experience and knowledge to guide you.