Liz Ann Sonders' Guide To Investing In Ridiculously Volatile Markets

Liz Ann Sonders

, chief investment strategist of Charles Schwab, published a report on how to properly invest in the market, using various statistics that show how to win on Wall Street.

Her advice revolves around creating a plan and sticking to it. Find out how much risk you are willing to take, and continue to invest with the strategy that you originally planned. If nothing else is taken from her report, she preaches stick-to-it-iveness more so than any single tip for investing.

Neither panic nor greed is an investment strategy

'We're always quick to remind investors that neither panic nor greed is an investment strategy, and that the best foundation to help protect a portfolio against the unpredictable is having--and sticking with--a long-term strategic asset allocation plan.'

Source: Charles Schwab

Long-term strategy trumps short-term tactics

'In reality, investors should rarely, if ever, react to a dramatic short-term move in the market. As intriguing as it may seem to try to catch bottoms and get out at tops in order to reap big profits (or so you think), the 'tactical' (or shorter-term) approach to investing has its limitations ... and its risks.'

Source: Charles Schwab

'Many investors assume that their position along the risk spectrum from conservative to aggressive is largely based on their age and time horizon. But a more important factor is their risk tolerance. Also important is judging the difference between an investor's financial risk tolerance (their ability to financially withstand volatile markets) and their emotional risk tolerance--a spread that's often quite wide and only acknowledged during tumultuous market environments.'

Source: Charles Schwab

High returns come with higher risk

'Clearly, over the long term, given the better performance by the riskier asset classes, a more aggressive allocation has historically reaped higher rewards in terms of returns. But there is a dark side to an aggressive posture's higher returns--the risk taken in getting there.

Who wouldn't want the higher return? Well, it depends on the risk you're willing to take to get there. What this table further shows is that the 9.9% return came within a much wider range of annual returns and, most importantly, was generated only through 'stick-to-it-iveness.'

Source: Charles Schwab

Market timing is a dangerous game

'It's enticing to try to 'catch' the next big investment wave (up or down) and allocate assets accordingly. But there are very few time-tested tools for consistently making those decisions well. Unfortunately, rearview mirror investing--or performance chasing--never seems to go out of style.'

Source: Charles Schwab

Average investors earn less than average funds

'Many investors think they can do better by waiting until the next 'perfect' time to buy or sell. Their track record tells us that they're generally wrong. Investors tend to pile in after a fund gets hot and then sell or stop investing after the fund has gone cold or the market has dropped significantly.

The gap between fund return and investor return measures how much worse investors did by moving in and out of funds than they would have with a buy-and-hold strategy. The gap for the recent 10-year period is 2.0% per year, totaling a cumulative 30.9%. Investors gave up more than a third of the total cumulative return due to poor timing.'

Source: Charles Schwab

Longer time horizons are better

'Based on several well-known studies, the length of time that individual investors hold stocks and mutual funds has shrunk precipitously over the past 50 years. Back then it was common for investors to have five-to-10 year time horizons, but today it's typically well less than a year. And the trigger for selling and/or buying is often short-term performance chasing: buying recent hot-performing funds or asset classes and running from recent losers.'

Source: Charles Schwab

Patience wins

'Admittedly, the development of a long-term strategic asset allocation plan isn't the hard part--it's sticking to it that often becomes the real challenge. We think that the best way for an aggressive investor to have generated the 9.9% annualized return since 1970 was for that investor to have remained aggressive throughout the period, including during 10 down years.'

Source: Charles Schwab

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