We came across this exchange on Twitter recently:
“The stock market is like someone playing with a yo-yo whilst riding the up escalator. The secret is to focus on the escalator and not the yo-yo!”
“Of course, you need to know which escalator you’re on. Otherwise, both are pointless.”
Think of the escalator as the stock market itself, gradually moving upwards. It’s been shown that investing in the stock market works over time -.historically providing a return of around 10% a year, provided an investor keeps their money in for long enough. The natural movement upwards can be attributed to increases in the global population, inflation and businesses selling more to more people. The important thing is to remain focused on the escalator over the long term as it continues to move in the right direction.
The temptation, however, is to get distracted by the yo-yo or the price of the market bouncing all over the place. There will always be volatility. There will be changes in interest rates, elections, natural disasters, financial crises and even global pandemics. The market will fluctuate in response. But just regard this as the yo-yo stuttering.
A fundamental truth of investing is that there are no returns without risk. Yet it’s only natural to panic sometimes. Try not to be swayed by emotion, however. Don’t make any knee-jerk reactions or suddenly decide to withdraw your investments.
As humans, we’re “loss averse” so we react more strongly to unexpected losses than unexpected gains. This is why our reaction to the yo-yo of the share price can be so illogical. When the price goes up, we get excited and think we’ve got exactly the right investments but as soon as it bounces back down, we’re in deep depression and those very same investments are terrible. Yet rationally we know stocks and shares go up and down, and have the potential to recover.
Long-term financial planning can make the difference in approach. If you’ve decided to be invested in the stock market as part of your overall strategy, have confidence in that decision. View it as the escalator beneath your feet taking you in the right direction towards your destination.
Of course, you need to make sure you’re on the right escalator first. If you get on the wrong escalator on the Tube, you’re going to end up on the wrong line and the wrong train unless you get off at the top and start all over again.
So think carefully about your goals.
- What do you want to be doing in 30 years?
- Are you planning on putting your children through private education?
- Have you got plans to move?
- When do you want to retire?
- Do you want to go part-time?
Those goals will change over time and you’ll need to keep adjusting your plans but they’ll help you decide on your investment strategy. Knowing where you’re heading with a robust plan will keep your eye focused on the escalator without getting distracted by that yo-yo.