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What now? Gain market perspective on the future with a look at the past

There’s no use in minimizing the current market environment, but don’t be fooled into believing this is a one-of-its-kind scenario. It’s important to keep a healthy perspective: It’s happened before. In fact, most of us were there for similar or worse markets in 1973, 1987, 1999 and 2001. While these downturns lasted different lengths of time, they all had one thing in common: recovery. So turn away from the perspective of doomsday postulations running rampant in the headlines for a moment, take a deep breath and think about what we know to be a fact. Every market downturn in history has recovered.

What can we learn from history? You’ve probably heard it before; you can’t hear it enough — the market has historically rewarded the long-term approach. Why? Simply put, reactions to volatility and short-term fluctuations are usually based on emotion and historically have caused investors to lose money.

Here’s what happens with most short-term investment strategies. Investors pull money out when the market goes down and then try to buy back in at just the right time so their investments can continue to increase. It sounds nice in theory, but the niceties also end at the theory level. There are two very real reasons why this is often unwise. It locks in the money that you’ve lost and requires you to sell at the market’s highest peak and buy at its lowest valley — neither of which can be foreseen with accuracy. You can think of it as paying an admission price in order to play a high-risk guessing game with your financial future. Unfortunately, in this environment, that’s not a game very many people can afford to play, let alone lose.

So what is the perspective of a long-term investor? Staying well diversified so that all your investments aren’t in one specific fund; reallocating according to how long you have before your anticipated retirement; maintaining consistent contributions through the short-term market swings; making investment decisions or changes based on proven principles, not on emotions. These are the enduring principles of long-term investing. They are the habits of many who have seen the previous market downturns and managed to retire successfully afterward.

Are these principles guaranteed to bring you a positive return? No. But it is guaranteed that abandoning them for an approach that involves predicting the market’s ups and downs will bring you much more risk.