The stock market has become increasingly uncertain since the start of the pandemic. Though heightened volatility is unlikely to continue across posterity, uncertainty still lingers amidst inflation, a potential recession, new variants of coronavirus and geopolitical drama.
The challenge lies in creating an all-weather investment strategy that can help you weather the storm. A strategic investment management approach creates the potential to not only keep your nest egg intact, but potentially grow it throughout turbulent times.
How to Proceed During the Period of Uncertainty
The most important thing an investor can do when the market becomes volatile is remain calm and unemotional. Focus on making rational decisions rooted in logic. Don’t let your emotions influence your investing decisions and instead focus on the bigger picture. A series of investing decisions rooted in facts and figures as opposed to knee-jerk reactions to negative events and speculation sets the stage for investing success even when there is a lengthy period of market uncertainty.
Diversify by Industry, Risk and Investment Vehicle
The value of diversification becomes apparent when markets become choppy. Allocating across countries, sectors, and across different sized companies means you are diversifying away risk inherent in any one particular category. As an example, one need only to look back to the “dot-com bubble” as a reminder of the perils that come up when your investments become too focused in one particular area.
Instead of putting all of your metaphorical financial eggs in one basket, spread them out. You’ll want some investments to zig when others zag. It’s been said that if everything in your account is going up, then you’re not diversified. While this may not be as exciting, it’s a long-term strategy that you can stick to. It’s an insurance policy against when (not if) the markets experience volatility again.
Pay Attention to Risk
Market uncertainty is likely to punish investors that have become excessively aggressive. As stock prices are rooted in expected earnings, the stocks of companies that do not have sustainable income will be hit especially hard.
Perform a comprehensive review of your portfolio to get a sense of whether you are overexposed to high-risk investments. Reducing your risk to a more appropriate level by rebalancing your portfolio could be a way to help you stay invested and even sleep better at night.
Consult With an Investment Management Professional
If you are like most people, you work full-time, have a family, enjoy hobbies, and don’t have much time remaining for investment analysis. Instead of trying to do it all yourself and running the risk of making a mistake, or running out of time for the finer things in life, consult with an investment manager.
Communicate your tolerance for risk, detail your current financial situation, and discuss your financial goals with this professional and he or she will actively manage your investment portfolio on your behalf. Even if you are simply looking for a second set of eyes on your current investment strategy, it can be extremely beneficial to consult with a financial professional.
Give preference to investment managers and other financial professionals who are fiduciaries. A fiduciary owes a duty of care to you, the client. This means this professional will steer you toward investments and strategies that make sense for your financial future as opposed to upselling financial products and services that pay them a commission.
Invest Broadly Instead of Narrowly
While you may want to follow oft-touted strategies of investing in what you know or establishing comparably large positions in your favorite publicly traded companies, investing the bulk of your money in one or two stocks is a mistake, especially when the markets become uncertain. Investing broadly means you are reducing your risk by spreading exposure across a wide array of companies and sectors.
As an example, an exchange-traded fund (“ETF”) consisting of stocks across a wide market swath will likely retain more of its value than individual stocks during a market downturn. You can also expand your investing scope away from individual stocks to baskets of stocks by investing in mutual funds and entire indices. Opt for a diverse investment portfolio that’s catered to your specific goals and concerns and you are much more likely to remain invested.
Though such investment diversification with a comparably broad scope limits potential upside during a bull market, slow and steady wins the race. Even if you owned high-flying stocks that had stellar financial quarters and significantly increased in value during a volatile market, those gains could disappear just as quickly as they came. Recognize that you are in the thick of a marathon as opposed to a sprint, invest broadly as opposed to narrowly and you’ll make meaningful ongoing progress even if the market takes one or several turns for the worse.
Adopt the Long View and be Patient
A volatile market is one characterized by wild upward and downward swings. Instead of trying to time the market right, focus on remaining invested throughout this volatility and your future self will be thanking you. Unless you are within a couple years of retirement or already retired, it is in your interest to adopt the long view of the market, recognizing that those who hold their investments for years and decades prevail over those that take a short-sighted approach.
Be patient, resist the emotional urge to sell your investments during a significant downturn and recognize that the market is inherently cyclical. Continue to hold your investments while making strategic adjustments as advised by your investment manager throughout the ensuing bull and bear market cycles. Add to your nest egg at a steady pace and you will gradually build the wealth you need to live comfortably during retirement.