After years of stock markets moving nearly straight upward, investors have had to deal with far more uncertainty so far in 2015, as the 6-year-old bull market has started showing its age and more market participants expect an inevitable downturn. Yet the most frustrating element of the market for many investors has been how stocks have stayed in a tight range despite vibrating wildly upward and downward, with the Dow Jones Industrials (DJINDICES:^DJI) having remained within a roughly 500-point range since February.
If you're trying to figure out the future direction of stocks, such oscillations can be extremely frustrating. Fortunately, a simpler solution can guide your investing through these rough patches. First, though, let's look at how turbulent markets can crush your confidence.
Buying high and selling low
The biggest problem with turbulent markets is that they constantly test your mettle for investing. When times are good, such as after Friday's favorable jobs report that showed the U.S. unemployment rate at its lowest level in seven years, stocks soar, and you'll be tempted to buy into the rally in the expectation of further gains. Yet when the next gloomy news comes -- whether it be from the threat of rising interest rates, disruptive market conditions such as plunging oil prices, or unforeseen geopolitical risk -- the temptation will be just as great to sell, even after stock prices have already fallen in response to that dour outlook.
If you give into the temptation to trade in the short term, then periods like this could cost you a huge amount in losses. Buying at highs and selling at lows might only cost you 1% or 2% with stocks in such a tight trading range, but when you repeat the process several times in such a turbulent environment, those losses can add up to a serious hit to your investing capital.
The better solution
Situations like this demonstrate the value of a long-term investing strategy. For those who aren't interested in trading on a regular basis, periods like we've seen recently are largely just waiting games, with the short-term ups and downs fading into noise over the long haul.
That doesn't mean long-term investors should simply tune out and ignore what's happening in the market. With specific stocks, news items can have long-term implications that you'll want to incorporate into the reasoning behind owning the stock. In some cases, dramatic changes will lead you to make the correct decision to sell in favor of a stronger prospect. But for the most part, the core of your portfolio will remain stable, and you'll be better prepared to deal with whichever long-term direction the market takes in the future.
Volatility is hard to live with, and it's easy to feel like you always need to do something. Often, though, the best course is to stick with the solid plan you've already developed and count on it to deliver the results you want over time.