“The key to making money in stocks is to not get scared out of them.” – Peter Lynch
The S&P 500 finished the quarter down 4.3% and down less than 10% from its February high. This might seem surprising given the headline news. And while Fidelity’s Peter Lynch is undoubtedly right, staying calm is a lot harder when you are investing your own money! The math is simple but the intuition is not. An example:
Stock A: returns +50% in year one but -50% in year two
Stock B: returns +10% in year one but -10% in year two
Which stock had the higher total return? The correct answer is Stock B (-1% versus -25% for Stock A). Volatility is a drag on portfolios. Professional managers know this and build all-weather portfolios that smooth out the ups and downs of the market. Individual investors, on the other hand, are tempted to time the market and often miss out on critical rallies. If this has happened to you, know that you are in good company.
We emphasize the need for portfolio diversification and risk monitoring in retirement plans for this very reason. Going all-in on NVIDIA, the Magnificent 7 (right), and other high-flyers is (extremely) enticing but few have the emotional discipline or ability to stomach the gyrations that owning them entails. Diversification provides a better experience, typically with better outcomes.
Comperio Retirement Consulting has been named one of the largest 100 Investment Consultants in the United States according to Pension & Investments (P&I) for the past 7 years