The last few weeks in the market have been filled with volatility. Since January, the S&P 500 had its worst performance, falling by more than 5%. Through the first two weeks of February, we were stunned by the choppiness of the markets. Analysts and experts believe this trend will not relent, fueled by concerns about interest rates and inflation, the Ukraine crisis, and the ongoing pandemic.
“We see a lot of headwinds,” said Craig Ferrantino, the CEO of Craig James Financial Services in New York. “Some of this is temporary, while others would take their time before they clear out. Economic uncertainty is at the helm.” Investors who dollar-cost average, that is, they regularly contribute to their investment accounts over time, would welcome market volatility. This is because they are hedging their risks by buying at both the market's highs and lows.
We are at a market correction, where the market falls by more than 10% from recent highs. For novice investors, this is scary. However, it is terrifying for millennials who have not experienced a market crash. For those concerned about their investments, here are some steps to take to gain victory.
1. Take Short-term Money Out Of The Market
In the next five years, any money you need should be taken out of the market and put into safer investments like a money market fund or high-yielding savings account. This includes cash for renovations, weddings, or other near-term goals like a home downpayment. For retirees who need constant cash, they should consider moving up to two years’ worth of expenses into more liquid asset classes rather than leaving them in the market.
The goal is to make sure your liquidity needs are met. That way, you can relax while waiting for the market to do its thing without feeling anxious. This will help you weather any potential recession.
2. Do Not Change Your Longer-Term Investments Plan
Everyone has a reason why they’re saving for a longer-term investment. Remind yourself of that. It could be putting money for a retirement that is far away or setting money aside for college tuition for your toddler. Be reassured that there is still plenty of time for your investment to recover from any dips or corrections in the market.
Experts recommend that longer-term investors keep a diversified portfolio with stocks having a heavier allocation. This is because short-term risks and volatility give you higher returns over time. But you should consider your risk profile and time horizon before doing the distribution.
“It is very difficult to time the markets in the short term. Even the biggest firms cannot,” said Anthony Mezzasalma, a financial planner with Mezzasalma Advisors. “The way to succeed is to have a long term plan.” Pre-determining your asset allocation for the long term will prevent you from making emotional decisions due to the swings in the market.
3. Be Realistic About Your Expectations
A short bear market hit at the pandemic, but investors still enjoyed record performance after some years. For example, the S&P 500 has been up nearly 60% over the past three years. Historically speaking, bear markets hit about once every two years, and annual returns are about 10%. Therefore, it is not realistic to expect your investments to continue to perform as in the past.
Granted, it can be a visceral experience to see one’s wealth vanish. But you gain the upper hand when you have a plan and stick to it.
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