Can You Handle Normal?

All of the excess daily noise notwithstanding, your ability to achieve financial goals boils down to two things: The first, can you accept normal market swings?; The second, can you stay invested in order to participate in long-term returns?

Almost everyone says yes to these two questions without examining what “normal” really means. In the average year, the broad stock market, (S&P 500), declines at some point during the year by about 14%. Yep, move along, nothing to see here. Moreover, about every six or seven years, the decline is roughly double that ( 25%+). Despite “normal” declines, the S&P 500 is positive in about 75% of the calendar years since 1980. You need to be able to “stay in your seat” when these inevitable twists and turns occur, in order to fund long-term personal goals.

Being able to withstand temporary setbacks is at the core of becoming a long-term investor. One of the main obstacles, however, is trying to attach reasons for normal market swings to some particular “current event”. As the averages attest, no reasons or explanations are needed…stock prices change every day. Prices are a reliable indicator of what market participants, in aggregate, think about value that day. Stock prices reflect both current knowledge and future expectations.

As long as you anticipate “normal”, you are likely to withstand the temptation to bail out of stocks at the first sign of trouble. Make this part of your mental preparation for the future. Ready for a real conversation?

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