These four fundamental principles can help you chart a course through a volatile investment environment.
If you’re like most investors today, you’re concerned about market volatility. And that means you’re probably paying close attention to the daily stream of news tracking the market’s ups and downs.
Problem: Where you focus your attention can influence the way you perceive your own progress.
Solution: Look past the inevitable market swings and steady drumbeat of news. If you stay focused on your own investment goals, you’re more likely to stay on track pursuing success.
To get a sense of how powerful context can be, take a look at the illustrations below.
While periods of economic and market strength often inspire investor optimism, market turmoil can lead to intense investor pessimism.
Problem: Your emotions can lead to poor investment decisions, such as buying stocks near market highs and selling near market lows.
Solution: Rather than chase new highs or panic when declines occur, take a realistic approach to investing that includes regular contributions and maintaining a well-diversified portfolio.
The market volatility and economic uncertainty of the past several years has severely undermined investor confidence. As a result, you may have given up on equity investing and instead sought the safety of cash.
Problem: If you’re in or near retirement and are starting to rely on your investments for income, having all of your assets in cash could leave you more vulnerable to the potentially damaging effects of inflation.
Solution: Although past results are not predictive of future results, stocks and bonds have generated relatively attractive returns that have outpaced inflation. Of course, stocks and bonds have also been more vulnerable to declines than cash, so including cash investments in your portfolio can add a measure of stability.
In the following illustrations, you can see how important stocks and bonds are to a well-diversified portfolio.
Market cycles inevitably include periods of strength and weakness.
Problem: The precise duration and scope of bull and bear markets are never clear until after the fact. So trying to time these cycles consistently is nearly impossible.
Solution: Sticking with a well-constructed investment plan is a key to long-term success. An objective-based approach to investing mirrors the way you manage your other personal finances. It divides your assets based on your needs and investment goals.
The result is a portfolio that is aligned with your short-term needs and long-term investment goals, which can give you the confidence needed to stay with your plan when markets go to extremes.
Throughout history and across market cycles, investors have always faced uncertainty, discouraging headlines and bouts of volatility. But over time, patient investors have been rewarded.
Following these four timeless principles of investing to create and maintain a well-diversified portfolio can help you pursue your long-term investment goals.
Note: It’s important to work with your financial professional when making changes to your financial plan.
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