2017 has been an eventful year in the news, with a seemingly endless stream of fast-breaking developments coming out of Washington and other parts of the world. Through all this commotion, the stock market has posted significant gains. Investors who have stayed invested in stocks have likely been rewarded.
At the same time, investors can’t assume that this market environment will continue. At some point, the long-running bull market (currently in its ninth year) could suffer a decline. Are there steps investors should take to prepare for that?
Investors who become fearful that a market downturn may be in the offing are often tempted to sell some investments and move money into less volatile alternatives. That could include low-risk bonds or cash-equivalent investments. But taking risk “off the table” by selling stock positions has its own perils – what we call “opportunity risk,” or missing out on potential future growth of those stock positions.
If you scan the news, you won’t have any trouble finding contradictory predictions about which direction the stock market is going in the months to come. Some might say stocks are going higher while others will warn that a major market downturn is on the horizon. The reality is that nobody knows for certain what’s going to happen in the stock market in the short-term. Basing your investment decisions on such speculation can be counter-productive.
Focus on your long-term goals
It is easy to be distracted by troubling headlines or sudden volatility in the markets. Too many people can make the mistake of extrapolating a passing piece of news into a longer-term trend, but quite often, that trend never materializes. Here are three keys to keeping your investments on track through periods of uncertainty in the markets:
1. Focus on fundamentals: Factors such as the strength of the economy, corporate profits and the values offered by specific stocks or sectors of the market are important. They tend to have a more meaningful impact on how stocks perform compared to short-term headlines that may briefly drive the markets.
2. Consider your long-term objectives: Your investment goals probably are not about using the money next week or next year, but many years from now, and over a longer period of time, such as through your retirement. What happens in the market today or tomorrow is not likely to have much bearing on your financial security in the years to come. Continue to invest focusing first on your ultimate objectives and the time you have to reach those goals.
3. Assess your risk tolerance and invest accordingly: If you are close to retirement, you may want to reduce your equity exposure. If you have more time to let your money work (and overcome any negative moves in stock prices), you may be able to handle more risk. Find a portfolio strategy that fits your comfort level and try to stick with it.
The key is to avoid rash decisions. Any changes made to your investment approach should be consistent with your long-term objectives.