Remain dispassionate while investing in downturn

I frequently write about investing discipline so it should come as no surprise that I advocate a series of, what I call, intelligent investing rules.

One or two rules are probably enough, though I present 12 in my book. Rule No. 4,: remain dispassionate but diligent, is particularly relevant in times of volatility. The first few weeks of this year produced initial despair—and, perhaps, after last week: a sigh of relief. Not much of significance has changed in those few short weeks—the underlying fundamentals of weak global growth remain—but investor sentiment can be fickle.

Historically, investors can identify plenty of things to worry about. On August 2, 1990, Iraq invaded Kuwait and an already-brewing recession in the U.S. became front and center. The total return for the Dow Jones industrial average was -12.5 percent (led by the banks) during the third quarter, but the index ended the year down a modest 0.6 percent. And though Operation Desert Storm began on the ground in mid-January 1991, stocks began a rally that produced an annual return of 24.3 percent.

Stick with investment plan amid brutal market correction

In 1994, the Fed raised rates six times, and stocks managed to produce a 5 percent total return. When the tech bubble burst in 2000, the DJIA logged in a decline of 4.8 percent. The terrorist attacks in 2001 and the subsequent war in Iraq, another series of Fed rate hikes and rising commodity prices did not hold down the market for long. Five years of positive returns began in 2003, and then 2008’s epic decline of over 30 percent was followed by seven years (so far) of positive returns. If you remained in the market, 2008’s losses have been recovered in spades. Diligent. Dispassionate. Steady as she goes.

So how do we implement a strategy of dispassion and diligence? The best example for me is driving, but not the routine, to-the-grocery-store kind of driving. I am referring to the treacherous, winding-mountain-road kind of driving. It terrifies me. But because I like to go to the mountains, I have had to learn to drive dispassionately and diligently. I have trained myself to focus on the road and avoid eye contact with the cliff.

Stock market selloff: Is it a blip or a panic?

If you believe the wheels are coming off the economy, don’t invest. If you believe — as investors often claim — it is different this time, then buy gold or build cash reserves, but don’t buy stocks. You must follow your own plan, establish your own goals.

My only point is this: if your time horizon is three to five years (or longer), stocks have historically demonstrated an ability to generate acceptable returns despite the fact they must frequently climb the proverbial wall of worry. Don’t focus on last week or last month. Keep your eye on the road and away from the cliff as you steer toward your long-term financial goals.

Nancy Tengler is the author of “The Women’s Guide to Successful Investing,” a financial-news commentator and university professor. Reach her at nancy.tengler@cox.net.