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With the S&P 500 now trading back below the 4,000 mark, fear and uncertainty have returned to the investing public. It’s difficult to focus on a long-term investing plan when all you can see is red, but it’s also necessary to maintain a cool head when times get tough.
Let’s walk through four strategies that can help keep your behavior in check when your portfolio is in the trenches.
Repeatedly checking your portfolio value when the market is in free fall isn’t going to make you feel very good. Obsessively refreshing your investing apps is more likely to encourage an emotional decision than a prudent one. Try to check your numbers only once in a while — quarterly, if you can stand it.
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For the purists, deleting your investing apps entirely can help eliminate the urge to constantly know how your stocks are performing. Research within behavioral finance has revealed that easier access leads to more trading; high emotions amplify this effect. Taking away that access completely makes it less likely that you’ll make an investing mistake, like selling at or near the bottom.
Diversification is arguably more important now than it has been in recent memory; high inflation, rising interest rates, international conflict, and domestic political discord contribute to this sentiment. Since there is no way to really know what’s around the corner (though many believe there’s a high probability of recession), the need to diversify is simply paramount.
What this means is ensuring you have a predetermined asset allocation (a plan for how much you’ll invest in each asset class) and periodically rebalancing on a fixed schedule. It also means spreading your money out widely enough to curb portfolio volatility; for most people, stocks, bonds, real estate, and other physical assets will be part of the equation.
Falling asset prices make up the current trend in most markets, but holding diversified assets will help keep your overall net worth more stable than if you were to commit to one investment by itself.
You can’t control what happens next in the stock market, so it’s a much better idea to focus your energy on factors you can control. The biggest financial factor you have at least some control over is your income. It’s never been easier to pick up a side hustle or gig work, most of which can be done remotely; if you have an entrepreneurial spirit, it’s worth exploring.
You also have significant control over your investing schedule. Instead of trying to find the market’s next bottom, consider setting up automatic deposits to your investment portfolio every week or two. This removes emotion from the equation and ensures you’ll at least be consistent with your investing behavior. What the market does in the short run is out of your hands.
It’s easier to say than to do, but focusing on long-run portfolio outcomes is imperative when it comes to sound investing and financial planning. Short-run volatility is nothing more than noise; before you sell all of your stock, remember that equity investing has been one of the most reliable wealth generators over the past century. The S&P 500, withstanding wars and economic calamities, has returned within the 8% to 10% range over the past 100 years (depending on how you treat dividends).
Further, selling after the market has fallen doesn’t do much good. This is because it may be more difficult to reach your long-term goals, you’ll have to renew your holding periods for tax purposes, and you’ll have given in to emotional decision-making around your investments. It’s better to understand that market volatility is part of the investing game and that this won’t be the last time we see a rapidly fluctuating market.
I can’t blame anyone for feeling uneasy about how the stock market has performed through the first eight months of the year. That said, this is an opportunity to demonstrate smart investing behavior and let the market perform as it will, all while focusing on what you can control. This includes avoiding looking at your stocks every day, building your income, and focusing on the long run as opposed to tomorrow.
History has shown that stock investing favors the patient. Be consistent with your investing behavior and you’ll be rewarded accordingly when the market reaches a new all-time high.
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