We're currently seeing a rally in the markets. Rising volatility and uncertainty is normal in this environment, but there's a simple trend that can hold true through any market environment - it has worked since 2016 and will work well into 2022 and beyond.
Don't Check Your Portfolio Multiple Times A Day
The stock market has been volatile, but it's not like the days of the dot-com bubble or the Great Recession.
While some investors may be worried about another recession, many are simply checking their portfolios multiple times a day.
"It's not healthy to check your portfolio all the time," says Jeff Tomlinson, president of Chicago-based financial planning firm Tomlinson Financial Planning. "You want to stay focused on your goals, rather than constantly worrying about where the market is going."
If you're checking your portfolio every day, there's a good chance you're doing it out of fear. And that's not healthy for your mental health or wealth building efforts.
Volatility is the new normal, but it’s not a reason to panic.
The current volatility in the stock market is not unusual. In fact, it’s quite normal. In fact, the S&P 500 Index has been volatile on average every single year since 1927 — with only two exceptions: 1954 and 1959.
As a result of this volatility, many investors are concerned about their portfolios. They have questions about how best to navigate through this time period, and what they should do with their money if things continue to get worse. Here are some suggestions for managing your portfolio in this uncertain environment:
Keep Perspective – The stock market is a reflection of the economy and its performance. It’s important to remember that while there may be short-term volatility, long-term gains are still possible over time (and at least some asset classes will see them). For example, over the past 20 years the S&P 500 has averaged approximately 12% per year (inclusive of dividends).
Rebalance Your Portfolio
This is a great time to rebalance your portfolio.
Rebalancing is a simple technique for managing your investments. It involves selling some of your holdings that have performed well (and therefore have appreciated in value) and using the proceeds to buy other holdings that have dropped in price. This helps you keep your overall portfolio at its intended allocation, which means you won't be overexposed to any particular sector or security.
Rebalancing also has several other benefits:
It helps reduce risk by allowing investors to sell high and buy low, which lowers their exposure to market downturns.
It can help minimize volatility in your portfolio, because it's easier to take losses when they occur than it is to make up for past mistakes by buying low and selling high once the market has recovered.
If you have an asset allocation strategy that calls for a certain percentage of your portfolio to be invested in stocks or bonds — for example, 60% stocks, 40% bonds — then rebalancing ensures that those percentages remain constant over time.
Recognize That Volatility Is Normal
The stock market is volatile, and it's normal.
The current volatility in the stock market has led many investors to panic and sell their shares. While this seems like a logical move, selling at the bottom of a market cycle can lead to losses that are much worse than what you would have experienced if you had held on.
Here are some tips for navigating the current volatility:
Recognize That Volatility Is Normal - The stock market is inherently volatile, so it should come as no surprise that we're seeing some turbulence now. Volatility does not necessarily mean that the market will crash or that prices will fall indefinitely. In fact, the S&P 500 has historically had an average annualized return of around 9% over long periods of time, even during periods when stocks were down significantly over short periods of time.
Have A Plan - It's important to have a plan when investing in stocks so you know how much money you can afford to lose before becoming stressed out about it or panicking and selling your shares. If you don't have a plan, then you'll likely make poor investment decisions while trying to figure out what the right thing to do is in any given situation.
Stay focused on the long term and don't let short term volatility derail your investment plans.
Investing has many advantages to those willing to take the time to learn the process, but it is not easy. There is a certain amount of skill required, and there are no guarantees that your initial efforts will always be successful. Given this reality, you may be feeling a bit of hesitation about investing at the moment. Don't let one bad year deter you from long term success. By adhering to proper investment strategy, you can mitigate risk, capitalize on opportunities, and have peace of mind that your money is off doing what it should be doing - multiplying!