When the markets get choppy, the best investors stay calm and focus on what they can control. Image source: Getty Images.
2016 has been a wild ride thus far. After having the worst start to a year ever, the U.S. stock markets rebounded strongly, only to be met with the surprise Brexit vote. Many investors fret over these market fluctuations, but are we being shortsighted?
While we should be conscious of the companies we own and how they are performing, wild market gyrations should not be our biggest concern. We cannot control the direction the stock market moves, so it's best to follow the age-old axiom and focus on what we can control. And we can definitely control our investing decisions, which should be our main focus.
Let's review three things investors should be doing in any market.
1. Save enough money to meet financial goals
While we can actively pick the stocks we buy in an effort to maximize our returns, we don't ultimately control how those stocks perform. What we can control is how much money we're saving toward our financial goals.
A 2013 study by the CFP Board showed that nearly half of Americans have a limited financial plan at best, and follow-up polls in recent years have shown the trend isn't improving. On the other hand, people who do have clear financial plans are better savers and feel more confident about the future. These findings held across all families regardless of income level.
Being a good saver starts with setting a goal. The more specific your goal, the easier it will be to determine how much money you need and to craft a plan for saving it up. Also be sure to set a target date for when you plan to reach that goal. Write it down on a calendar and remind yourself monthly what you are saving for. Planning for retirement? Then be sure to factor in specifics like where you want to live, how you'll spend your time, and how much income you'll get from various sources.
Let's say you want to buy an RV for traveling in. You'd like to buy one when you retire 15 years from now, and you expect to spend $100,000 on it. In this case, you'd need to save $556 each month to cover that future purchase ($100,000 / 180 months). And if you're investing for growth, then the performance of your investments should offset any price inflation. As you approach your target date, however, you should think about shifting those savings into more conservative investments in order to preserve what you've built up.
No matter what your financial goal may be -- purchasing a home, buying a car, going on vacation, starting a business, etc. -- being specific about your needs and your plan is a simple way to help yourself reach that goal.
2. Control your spending with a budget
Personal income is not an unlimited resource, so keeping track of our spending is vital. The most effective way to control your cash outflow is to create a budget.
A Gallup poll showed that only 1 in 3 Americans track their monthly expenses using a budget. This is a surprisingly low number, considering how common online banking and financial-management software has become in recent years.
Knowing and controlling where your money goes can help ensure that it covers your needs and wants, rather disappearing on impulse purchases. It can also help you avoid piling up debt and free up cash to save toward your biggest financial goals.
Much like savings, a budget can benefit from being specific. Don't stop at setting spend limits on necessities, but also set limits on discretionary purchases like eating out, shopping, and entertainment. The more specific your categories, the better your control will be over where your money is headed.
Prioritizing a discretionary budget based on what you enjoy doing is a good idea. Let's say you're a foodie and enjoy eating out at a nice restaurant once a week. After listing all of your necessary spending like rent and utilities, the next line might be your eating-out budget for the month, set at $100 each week. Assess your progress throughout the month. If you're averaging less than $100 each week, then you can splurge on your next dining experience. If you're averaging over $100, you have two options: find a thrifty restaurant for next week or take money away from a discretionary spending category that might be less important to you.
Budgeting is something we can exercise control over. Need help getting started? There are a number of programs and mobile apps that make tracking and controlling your expenses easy, including Mint and Goodbudget.
3. Don't let emotion rule your decision making
Unexpected things happen. When a curve ball comes our way, all we can do is keep our emotions in check and react stick to our investing plan. The best way to weather any market is to buy quality companies that won't be sunk by unexpected macroeconomic developments like Brexit, collapsing oil prices, or Federal Reserve surprise decisions. Rather than hitting the panic button, try to ignore the headlines and how the new information may affect your holdings. Better yet, take it one step further and buy more of the quality stock you own if it has been needlessly punished.
As a recent example, the surprise vote in the U.K. last month to leave the European Union caught many investors off guard. Global markets quickly dropped in the days that followed, and some investors fled for the exits. The wave of worry quickly subsided, however, and markets staged a rebound. Those who reacted emotionally and sold during the drop were left on the outside looking in as the market losses quickly dissipated.
The U.S. stock market as illustrated by the SPDR S&P 500 ETF before and after Brexit.
Takeaways for investors
It's easy to let the news to consume our thoughts, especially when fear is being peddled. But does it really do any good to worry if those events are outside our realm of control?
Rather then succumb to fear and emotion, good investors focus on what lies within their power to act on. Ignore the day-to-day movements of the markets. Pick out solid companies for the long term, then focus on the steps you can take to control your financial future.
