(Bloomberg) — The return of FOMO Adding to concerns that the market could plummet.
Strong earnings and a downward trend in overall inflation have fueled a surge in the S&P 500 that few people want to miss.But with the index up 30% over the past 52 weeks, driven in large part by a handful of stocks such as artificial intelligence company Nvidia Corp., some market watchers worry that could Melt and unfold.
Below, market veterans and financial advisors offer tips on how to navigate volatile markets and create a portfolio that sticks. Recessions are inevitable. But thinking about the potential impact of a decline can help prevent any rash moves. So, keep the following points in mind.
Markets tend to recover quickly
To put market declines into perspective, Sam Stovall, chief investment strategist at CFRA Research, recommends viewing stock market history as a “virtual stabilization.”
“What’s surprising to me is how long people think it will take to get back to breakeven from a correction or from 10% to 20%,” Stovall said. “Most people would say a few years, but the average is about four months. ”
The speed of the market rebound is not conducive to trying to time the market. Additionally, depending on market timing, you must correctly judge when to exit and when to re-enter. Stovall said people often talk themselves out of getting back into the market, fearing that a bullish move might just be a prelude to another decline. .Missing some of your best performing days can result in a big impact On long-term returns.
Economic downturn is normal
For a well-functioning stock market, new highs are normal, as are declines.
“As a disciplined investor, you have to accept up front that even in good markets, this won’t continue indefinitely—markets do fall,” said Charles Schwab, managing director of financial planning. Rob Williams said. “The good news is that they are generally recovering and the general direction of the market continues to be upward.”
A Schwab analysis The intra-year decline of the stock market in the 20 years from 2002 to 2021 was studied. In 10 of those 20 years, the decline reached 10%, so half the time, the average retracement was 15%. Over the next two years, it fell by nearly 10%.
That sounds stressful, but the good news is that stocks rose during most of those years, averaging about 7%, Schwab said.
Diversity is protection
The S&P 500 is particularly important, but most people don’t have all their money invested in the index or the large-cap tech stocks that drive its performance.
Whether you use a financial advisor or gain exposure to the stock market through a target-date fund (TDF) in your workplace 401(k) retirement plan, your stock holdings may be more diversified than you think.
“We continue to educate and remind our clients that they are not just investing in the S&P 500 (and large-cap tech stocks), there is tremendous volatility, emotional trading and inherent risk in these stocks, as evidenced by the decline of these stocks in 2022. ,” Laura Mattia, founder of Atlas Fiduciary Financial. “While large-cap U.S. stocks may form part of our clients’ investments, their overall portfolios remain well balanced across asset classes and are not overly bloated.”
Knowing how your TDFs are invested can give you peace of mind knowing if the market is down and simply search for funds on Google, check your 401(k) plan website, or morningstar.com.
For example, anyone approaching retirement in the Fidelity Freedom 2030 Target Date Fund (FFFEX) holds about 56% in stocks as of the end of 2023. But it’s not just in the S&P 500. Equity positions are spread across index funds by geography and style, including international stocks, growth stocks, value stocks, large-cap stocks and small-cap stocks.
At the same time, the proportion of young investors holding stocks in Fidelity Freedom 2055 Fund (FDEEX) is 83%, and they are distributed in different regions, different market capitalizations, and different value and growth styles. In theory at least, young investors should welcome an economic downturn and buy more stocks at lower prices. (If you participate in a 401(k) plan and stay fully invested, your regular contributions can do this.)
Rebalancing reduces risk
If you or a financial advisor has set an asset allocation for your portfolio, e.g. Classic 60/40 split Between stocks and bonds, your portfolio could spiral out of control given the market’s rise. Your portfolio is designed to reflect your goals and the time horizon associated with those goals, so getting the percentages back in line can keep you on track.
Selling appreciated stocks in a taxable account does mean paying capital gains taxes the following year, but it locks in gains and reduces portfolio risk.You can offset these gains by doing a few things tax loss harvesting to realize losses.
Schwab’s Williams recommends rebalancing annually. “If you rebalance more frequently, you may overreact to market movements,” he said.
You can create a buffer
Many financial planners manage client money in different ways bucket” specified for different goals and time frames.
Investments for short-term needs will be conservative. George Gagliardi of Coromandel Wealth Management said that for people approaching retirement and needing to tap into their savings to cover expenses, that bucket would be low-volatility bonds of one to three years, such as Treasuries or short-term high-risk bonds. Quality Bonds.
There would be a medium-term bucket, perhaps to fund a child’s college education, and a long-term bucket for retirement. If you still have decades to retire, that bucket will be heavily invested in stocks so you can achieve higher long-term growth and beat inflation. Since you have short-term funds available to meet immediate needs, you don’t need to dip into long-term funds and can avoid selling stocks during a downturn.
To contact the author of this story:
Suzanne Woolley in New York (email protected)
