“If you don’t know where you’re going, any road will take you there.” (Cheshire Cat from Alice in Wonderland)
Why is the above phrase so important when it comes to investing in uncertain markets? That’s because if you don’t have a proper investment plan and strategy, you’ll have no idea how your portfolio will react when the markets get volatile and uncertain, and more importantly, whether your specific goals are liable to be met or not. Without the important knowledge of your ultimate destination and road that will get you there, you are much more likely to worry, panic, and even sell at the worst possible time when the markets are falling. There’s nothing like a 20 or 30% drop in the stock market to scare investors out, only to leave them sitting on the sidelines with their cash as the market then recovers. Therein lies the dilemma of trying to time the market. You must be right twice. First, you must be correct in getting yourself out before the market drops, but then you also have to be correct in getting your funds reinvested at some point lower than when you first got out. A very tricky proposition indeed, and a virtual impossibility to do so consistently over time. So what is an investor to do when the markets are uncertain? Here is a three-step approach to help alleviate your anxiety and help you control your emotions when the markets are uncertain.
First, create a tailored investment and financial plan that defines your short and long-term goals. This plan should also take into account your tolerance for the “ups and downs” of the market. A sure way to blow up your plan is to try to time the market, and allowing your emotions to dictate your actions, rather than having a disciplined plan and strategy that will lead you to make the necessary changes as needed (regardless of the current market conditions).
Second, invest your funds at that appropriate level of risk. Historically, stocks have produced a greater return, but with that comes greater volatility. If your goals are long term, and you have time to ride out market storms, then a larger portion of your portfolio can be allocated to stock investments. However, if one or more of your goals are short term in nature, say a few years or less, or the prospect of losing money makes you skittish, then you will want to consider putting more of your funds into bonds, CDs, or short-term cash investments. These investments, while historically producing lower returns than stocks, do generally offer lower volatility and chance of loss. Once you have decided on your mix of stocks, bonds and cash, it’s time to research and then select the appropriate investments for each of these asset classes. It is vitally important to choose an allocation that you are comfortable with from the beginning, so when uncertain markets hit, you’re much more likely to stay the course and continue on to your final destination.
Third, manage your plan. Monitor the investments you have selected for changes in their performance, risk level, or overall strategy. Research additional investments and replace lagging investments as needed. Rebalance your investment mix to maintain the level of risk you’re comfortable with and decided on in the first place. As your investments’ performance will vary over time, it’s very important to keep your initial mix in check versus the current mix in order to avoid taking on additional risk by not rebalancing. Revisit your investment plan at least annually to see if your financial circumstances have changed and to verify that the original plan still makes sense. Having an appropriate allocation and plan are the fundamental backbones to investment planning, and will allow you to not let fear derail your investment goals when markets are uncertain.
In summary, investing in uncertain markets requires a plan and discipline to reach your goals. It’s about the proper balance between risk and return, choosing the right mix of investments, periodically rebalancing them, and then monitoring your choices to make sure they are still appropriate. These steps are what will provide you the best chance of success in uncertain markets. In the game of chess, it’s the thought-out, planned, and consistent moves that lead to victory. This is also true of investing in uncertain markets. Help yourself today by developing an investment plan. With that plan in place, there will be no need for fear during market swoons, nor a feeling to try to time the markets. Instead, you’ll have the peace of knowing you’ve prepared for all this uncertainty, well in advance, all of which will allow your long-term goals the best chance of succeeding over time.
©2020 SVA Financial Group
All information herein has been prepared solely for informational purposes only and opinions are subject to change. Past performance is not indicative of future results and all investments involve the risk of loss of principal. For information on how these general principles apply to your situation, consult an investment professional.