Where will the Dow Jones Industrial Average finish in 2015? While the actual performance of the stock market this year is anyone's guess at this point, there's a better question you should be asking: Does it matter?
We asked three of our analysts why they aren't too worried about the market's performance this year -- or any other year, for that matter. Here's what they had to say.
I'll be the first to admit that I track how my investments perform on an annual basis, comparing them to market returns. But while doing so gives me some information about my investment process, I recognize that a single year never matters too much in the context of my long-term financial goals.
As an extreme example, take 2008, a year in which the markets dropped almost 40% and crushed many investors' portfolios. In response, many panicked investors pulled all their money out at the lows, missing out on the ensuing rally. By contrast, those who stuck with their long-term investing strategy were able to use the low stock prices in 2008 and 2009 to pick up bargains that produced huge returns. Indeed, within just a few years, those who had stayed in the stock market had recovered all of their lost ground and benefited from the subsequent moves to new all-time record highs.
Single-year returns can seem important, especially when you experience the pain of a major loss. Over the course of an entire investing career, though, focusing on just one year can tempt you to lose focus and make mistakes that you'd avoid by sticking to a longer time horizon.
I really don't care what the market does this year because I'll have reason to celebrate either way. Obviously, if the market goes up, your stocks will probably increase in value and help you get that much closer to your ultimate investing goals.
On the other hand, if the market goes down, I look at is as a buying opportunity. All of the stocks that are in my portfolio are there because I believe in them over the long run. And since I have a few decades until retirement, I actually want them to go down in the short term. As the market goes down, you'll have an opportunity to buy more shares of the companies you love at a discount.
The best way to make sure the market's performance this year won't affect you one way or another is to ask yourself the following questions. If a stock in your portfolio were to drop by, say, 30%, would you panic and sell, or would you want to buy even more? And if a stock were to gain 50% this year, would you sell it and move on, or hold on for the long haul because you believe in its long-term potential?
If you answered "sell" to either question, you may want to rethink the stocks you own. If not, you really shouldn't care too much what the market does this year either.
The human brain isn't hardwired to deal with the ups and downs of the stock market. Anyone who has invested for a long period of time inevitably has a lot of money in the market. After 20 years of saving and investing, it's possible that one bad day in the market could wipe out an amount equal to a week's paycheck. A bad year could wipe out several years of income.
But ups and downs are temporary. To quote one of the greatest investors of all time, Howard Marks, "Most things are cyclical -- loss comes from forgetting that."
In reality, the movement of stocks only matters if you are a net seller -- that is, if you're cashing out. If you're in it for the long haul -- as you should be if you're investing for retirement -- the ups and downs mean very little. Warren Buffett explained that if you are a net buyer of stocks, you actually want lower prices. You can buy more stock that way.
If you have several years or decades until retirement, you don't need to worry about a single year. If retirement is just around the corner, you should own fewer stocks, allocating more into less volatile bond investments. In such a case, the movements of the stock market shouldn't have a big impact on your portfolio either way.
The bottom line is this: If you have your asset allocation and mind-set right, a single year simply doesn't matter.