October 12, 2021
What we’ll cover:
Market turmoil can put even the most confident investors on edge. The nerves are totally understandable: It’s tough to stomach the wild drops in investment portfolio values when the stock market takes a hard, sudden and seemingly prolonged hit. These are the moments when investors are truly tested.
When stock prices are on the rise, many don’t need much convincing to stay invested. But when the markets take a steep tumble, it often sends people into a frenzy — anxious to do something in response to the volatility and uncertainty.
One of the most important things to do in these times is to stay calm and avoid making emotional investment decisions. Of course, that’s easier said than done. While what’s happening in the stock market is largely out of our control, what we can control is how we react to the volatility.
First, let’s be clear: It’s OK to feel a little anxious during a downturn. But it’s important to keep our emotions in check when making investment decisions. Fear and desperation could lead us to making poor calls that could hurt our portfolios in the long run.
When it comes to investing, basic principles like maintaining a diversified portfolio and staying invested for the long haul are timeless.
Let's go over four tips to keep in mind during times of market uncertainty.
Together, a basic understanding of investing and your risk tolerance can do much to help you maintain a steady head and steady hands when stock prices go for a stomach-dropping ride.
Those who are new to investing may get jittery during a stock market downturn. This is why having a solid grasp on the basics of investing and how the stock market works can help calm nerves and boost confidence.
For example, if you have a strong foundational knowledge of the stock market, you would know that volatility is inevitable but that it’s also important to stay invested for the long term because, historically speaking, the value of the stock market has trended upward over time.
Understanding your tolerance for risk can also help you stay level-headed when the stock market goes haywire. This is where you ask yourself how much risk you’re willing to take on to achieve your particular investment goals. Some will have a higher tolerance for risk than others. There’s really no right or wrong answer here – it all depends on your personal situation and comfort level when it comes to investing.
Remember, a key part of investing involves the proper balancing of potential risk against potential reward. And having an investment plan or strategy in place that reflects your risk tolerance could help you resist the urge to react emotionally during a downturn, giving you the confidence to stay in the game and ride out the turbulence.
Risk is an inherent part of investing, and it’s something that you cannot completely eliminate. But risk can be managed with certain investment strategies.
Diversification is one way to help protect your portfolio from the ups and downs of the market. While diversification as a strategy doesn’t guarantee against losses, it can help limit your exposure to certain investment risks.
By diversifying your investments – where you invest in a mix of assets (think: bonds, stocks and/or ETFs) — your portfolio can be better prepared to withstand certain market shocks. The idea is that if one asset (e.g., a particular stock) takes a hard hit, other parts of your portfolio may help cushion the blow.
You may also want to check and see if you need to rebalance your portfolio. What do we mean by this? Over time, the asset allocation (read: mix of assets) in your portfolio can shift away from your original allocation. This can happen when certain assets outperform others within a period of time. For example, if your portfolio’s original asset mix contains 60% stocks, a good showing in the stock market from previous quarters could increase your stock allocation to, say, 70%.
When this happens, you may want to consider rebalancing (or resetting) your portfolio to its original allocation to help ensure that your investments still accurately reflect your appetite for risk.
Another question you might ask yourself is whether your particular mix of assets (or asset allocation) still makes sense for your financial goals. For instance, as you get closer to retirement, you might become more risk-averse, opting to invest in more bonds rather than stocks.
The bottom line is this: Preparing your investment portfolio with certain risks in mind could ease some concerns when the stock market hits a big bump down the road.
It’s never easy to watch stock prices and portfolio values fall. Some inexperienced investors might be tempted to make a quick exit from the market, selling at a loss just to avoid further pain.
When it comes to investing, however, it’s important to take the long view and not let short-term market volatility distract you from your long-term goals. By staying in the game, you’re generally in a good position to reach your long-term investment goals. This is particularly important for those with a long time horizon to keep in mind, as they have more time to ride out the ups and downs of the market.
While falling stock prices might be a troubling sign, you could also look at it this way: It means that stocks are essentially on sale, and there’s an opportunity to buy them at a potential bargain.
If stocks are already a part of your retirement plan (e.g., IRA or 401(k)), by simply maintaining (or increasing) your contributions, you’re in a position to take advantage of the lower stock prices. That’s because your regular contributions would help to purchase additional shares automatically.
To some folks, it might seem irrational to put more money into a shaky market, but there’s good potential for it to pay off in the long run if the market recovers and stock values climb again.
Good to know: Before going on a buying spree on your own, it’s a good idea to check in with your investment advisor first. When markets are volatile due to economic uncertainties, the potential risk is that stock prices might continue to drop, so you would want to talk through any strategies you might be considering with a professional who understands the cyclical nature of the financial markets.
When things get dicey with the stock market, it helps to know that you don’t have to weather the turmoil on your own. It’s normal to feel anxious, especially since it’s almost impossible to tune out the scary headlines and the endless news cycle on television.
This is why checking in with a financial professional during uncertain times is a good idea. Financial experts can serve as a shelter in the storm, helping you to tune out all the noise and empowering you with options.
They may review your investments with you and discuss potential actions you may consider taking. In some ways, volatility in the stock market is a good reminder for some investors to revisit their investment strategy and correct any imbalances if necessary.
Financial experts could also help give you some historical perspective on the markets. For instance, take a look at the table below: The S&P 500 posted positive returns during 3 of the last 7 US recessions, dating back to 1973. The average returns during the 6 and 12 month periods before and after a recession have also been positive.
Note: From Goldman Sachs Ayco Personal Financial Management, “Educated Investor Series: Investing Is a Marathon,” p. 7. Reprinted with permission.
Data Source: FactSet, National Bureau of Economic Research (NBER). Data as of 8/31/2021. The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, employment, industrial production and wholesale-retail sales. There is no universally agreed-upon definition of a recession, and recessions are often determined only in hindsight.
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