US markets turned in their worst returns in years this August. So, as an investor, what should you do about it, if anything?
Research shows that emotional selling, or bailing out of investments because things are scary, is all too common. This is bad because investor behavior and poor decision-making can adversely affect returns. A study released in 2014 showed that the average individual equity investor had a 20-year average annual total return that was 4.20% less than the index, directly related to poorly timed decision-making.*
Take the emotion out of your investment strategy by doing these five things when markets get choppy:
1) Know your history
Since 1900, there have been 35 declines of 10% or more in the markets. Of those 35 occurrences, or “corrections” as they’re sometimes called, the index fully recovered its value after an average of about 10 months. And a 10% drop doesn’t necessarily lead to a 20% one (which denotes a bear market) — in fact, in just 12 of the 31 corrections in the S&P 500 over the last 50 years did a bear market eventually ensue. If anything, the reason that recent drops seem bigger is that they came after a 47-month period without a 10% correction — the third longest such span in market history.
With that perspective, if your investing time frame is years or even decades from now, it may be best to sit tight and stay invested.
2) Be realistic
The S&P 500 more than doubled in value from March of 2009 through December 31, 2013 with an annualized return of more than 20%. The S&P 500’s average annual total return over the past 50 years is 10%. We’ve been in a recent few years of outstanding results–a seven-year bull market. With long-term historical returns of the S&P 500 as a precedent, keep in mind that results like that are unsustainable; your expectations may have become unrealistic.
Over those last few years, some investors have seen their portfolios double in value. It is not prudent to assume that rate of growth can continue. Although there are no guarantees, an average annual return on an investment of 10% is in keeping with the long-term historical trend. This pace is sufficient to help you achieve your financial goals. An investment doubles in slightly more than seven years at 10%.
3) Look at market corrections as a buying opportunity
Historically, market downturns present us with some of the best opportunities to buy stocks, sukuk or mutual funds at a discounted price. If that new computer you had your eye on were to go on sale at 10% or 20% off, you would probably consider making a move. If a stock or stock fund were to similarly go on sale, it may actually be a good time to buy.
4) Make sure you are properly allocated
Periodically, you should revisit your portfolio to make sure it is aligned with your time horizon and financial goals.
By developing a balanced portfolio of investments, you make sure that not all your eggs are in one basket. This is known as asset allocation. A portfolio that mixes a variety of asset classes generally has a lower risk for a given level of return. Although it cannot guarantee a profit or protect against a possible loss, asset allocation, or diversification, can help spread the risk of investing because it broadens your investment base.
5) Remember to rebalance
Having a mix of assets that works best for your situation is an important part of investing. Over time, however, market moves can affect the allocation of your assets. For example, because of outsized market performance since the end of the Great Recession, your portfolio may have become too exposed to stocks for your goals. Therefore, you might be taking on more risk than you realize and should consider taking some of your gains off the table and reallocating them to less volatile halal fixed income. That’s called rebalancing, and we can help you do that.
Remember that investing is a process—not an event. You should not make rash moves in response to market cycles. Although you cannot control what happens in the stock market, you can control how you prepare and respond. Market ups and downs are part of investing. The important thing is to stay invested, remain patient and have a plan. Give an Azzad investment advisor a call at 888.86.AZZAD. We would be happy to discuss your risk tolerance, investment goals and time horizon.
*DALBAR, Quantitative Analysis of Investor Behavior, 2014. Dalbar.com
Past performance cannot guarantee future results. No investment strategy can eliminate the risk of losses. Asset allocation, rebalancing and diversification are investment strategies used to help manage risk. They do not ensure a profit or protect against a loss.
Opinions expressed are those of the author or fund manager, are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security and should not be considered investment advice.
Fund holdings and sector allocations are subject to change and are not a recommendation to buy or sell any security. Click here for Azzad Ethical Fund current top 10 holdings. Click here for the Azzad Wise Capital Fund current top 10 holdings.
Past performance does not guarantee future results.