If you are like a lot of investors who are anxious, you have become derailed in your thinking in recent weeks, feeling that the bottom might fall out. The recent news seems bad, then good, and then you wonder what can happen next. Anxious investors often focus on what has happened recently and then they over-generalize to the future. If you are like a lot of anxious investors, you think that current bad news means that the future will unravel. And you believe that this can happen very, very quickly.
But a major component in assessing risk is time-perspective. If you are focused on the short-term and you believe that this predicts the future, then your emotions go up and down with ticks in the market. You sit by the screen, watch your stocks, focus on changes of less than a point for a stock and have a financial panic attack. You are not alone. But that won't comfort you, because you think all of you are going over the cliff.
Take a look at the following graph of the past nine months for the Dow Jones Industrial Average:
Now take a look at the DJIA for the past 18 years.
You will notice a few things if you look carefully. The shorter time perspective for the DJIA (for 2008) looks down-in fact, it may feed your anxiety and depression. But the longer-term perspective offered in the graph for 1990-2008 looks quite promising. The second thing to notice is that the shorter term graph has 10,500 as the bottom and the longer-term graph has 2000 as the bottom.
One way of looking at risk in your anxious market is to think about time-horizon---how long you plan to stay in and, looking back, how long you've been in. The longer-term investor has done well.
Take a look at the graph from 1980 until September 19, 2008-and notice that the market was at about 750 in 1980 and it's at 11, 388 on September 19, 2008:
Before you have a financial panic attack you need to ask yourself when you will need to take your money out of your retirement accounts. If it's tomorrow, then you have reason to be concerned. If it is in five or ten years you might decide to go back to sleep and like Rip van Winkle wake up to a new day in the distant future.
Someone once asked Warren Buffett what was the ideal length of time to hold a stock. He replied, "Forever". I assume Warren wasn't holding Lehman Brothers stock.
The old "dollar cost averaging" approach---keep putting in the same amount of money on a regular basis over a long period of time--- may prove to be the best way to manage risk. Trying to time markets, guess at stocks, and get rich quick are often sure ways to lose money and incur trading costs.
So, what's the best way of getting rich? Of course, inherit a lot of money. But if that is not possible, the best way of getting rich is slowly---very slowly-over a long period of time. And to live within your means.
Nervous about the markets? Stretch the time horizon.
And, maybe there are bargains out there in the panic.