Rising inflation, interest rate movements, ongoing trade wars, COVID-19 variants, bear market predictions, the Russian attack on Ukraine and heightened geopolitical uncertainty, …that’s a lot to think about.
The first quarter of 2022 reminds us all how much uncertainty can fill the world at any given moment— and how little control we have over it all. This perceived lack of control can lead to feelings of anxiety and stress in our everyday lives. One of the best coping techniques is to focus on what we can control. The key to this strategy is identifying what is actually in our control and what is not. This is especially true when it comes to your portfolio. So, let’s remind ourselves of what we can and cannot control during our own investment horizons.
Every downturn in markets inevitably brings with it the question of “is it different this time?” This sort of market behavior is a constant recurrence throughout history but takes a wide range of forms along the way. Consider the U.S. stock market as proxied by the S&P 500 index. Since the beginning of 1980, the S&P 500 has gained 12.3% per year and finished 35 of the 42 calendar years with positive performance. But the ride has been far from smooth as shown by the average 14.5% intra-year decline during that same period.
This highlights the importance of staying the course. For example, if an investor sold at the bottom of the COVID-19 market downturn in March of 2020, they would have missed out on double-digit returns by the end of that year. Morningstar analysts point out that even a less risky 60% stock/40% bond portfolio experienced a 10% loss or greater in 22% of the rolling 12-month periods over the last 30 years.(1) We need to remind ourselves that we cannot control the exogenous forces that affect our investments; risk and price swings are the price of admission we pay as investors.
Having a historical perspective of market volatility is helpful, but those who plan ahead for what they will do when volatility shows up are often better served. First, taking action for action’s sake rarely proves profitable over the long term even for professional money managers – don’t feel like you need to do something just because markets are down. However, there are steps you can take to regain control and peace of mind in the face of uncertainty. For those drawing down on their portfolio, meet with your advisor and discuss how much you are withdrawing. If taking money from your portfolio during volatile markets makes you feel uneasy, remember that we account for down markets in your plan. If you still don’t feel comfortable, defer some spending that might be able to wait like a vacation or a new car purchase.
For those still saving toward retirement and other long-term goals, review your planned contributions and the amount of emergency funds available outside of your investments. Markets have historically recovered, even from inflation and geopolitical shocks, so investing additional money while stocks are down could provide a boost to your portfolio over the long term. And having a fully funded emergency fund gives you that much needed emotional buffer for when markets go haywire or life throws the unexpected at you.
Once you’ve met with your advisor and considered making any warranted adjustments, performing the last step is often the most difficult for some: stop looking at your portfolio. It is certainly easier said than done, but limiting excessive looks at your portfolio will provide less temptation to act out of emotion rather than on facts. Instead, use that time to reconnect with family, friends, community and yourself.