March 15th, 2016 | David Simpson

Investing with a long term plan instead of reacting to the market

The rudder on a boat lets you steer your course but it is only as good as the direction that you have plotted to navigate the course. When seas are calm, the direction is easy to see. When seas are rough, you need a plan set in place that will guide your course. December 2015 through February 2016 have been very rough for various stock market indexes throughout the world. The stock indexes do not go up or down in a straight line but can be smooth or choppy depending on what is going on in the world.

Over the last three months, the returns have been rough for the S&P 500 with the index down—6.59% for three months and down -6.19% for the last twelve months but it was up 6.44% for the last ten years (periods ending 2/29/2016, total returns per Morningstar). During these turbulent times, it is very important to stick with your long-term plan so that you do not react to the market volatility in any given period.

It’s true that 2015’s return was not a significant increase; however, it is important not to make a decision on whether to invest in “the market” based on how it did in any given year. There have been 24 individual years in the 90-year return history where the total return of the S&P 500 has been negative and 28 with returns of less than 3%. Investors who panic and sell based on a given year’s performance for a broad index ignore the success that comes from holding for the long term.

When looking at the five, ten, and twenty-year returns, the amount of negative returns decreases significantly with 11 of the 86 five-year returns, 5 of the 81-year returns, and none of the twenty-one returns. The only 20-year period that had a return of less than 3% was 1929—1948 compared to the most recent 20-year period ended 12/31/2015 with a return of 8.27%. It is important to hold cash and low-risk assets to make sure that you can take advantage of time in the market versus timing the market.

Food for Thought: Do you have an investment course charted out or are you letting the market waves dictate the course you follow and your eventual destination?