Walking toward that retirement red zone can be a gut-testing experience when the markets are crashing. But it’s necessary to find equilibrium on the confidence/ambiguity spectrum in the best and worst of times.
On the way toward your goals, “don’t overthink market volatility,” says JJ Kinahan, chief strategist for TD Ameritrade. “There was so little volatility in 2014 and 2015 that now, when we’ve returned to normal levels of volatility, it feels odd.”
“But over market history, it’s not been unusual for the CBOE Volatility Index, VIX, to drift between 20 and 30—which is where we’ve seen it for much of this year,” he adds. “ Traditionally, the VIX has spent more than 30% of each year in that range.”
Moreover, no matter what the situation, you can find instruments that have more upside, or downside, profit potential. The challenge is that they all involve some level of risk and increased volatility, which can make them seem scarier.
Bear markets, defined as a 20% drop in market valuation, come and go with market cycles. Market corrections, which are expressed as a 10% retreat, happen with relative frequency.
There’s more. Wall Street analysis reveals that the market has pulled back 5% four times a year, on average, or about once a quarter, throughout its history. But get this: it has typically recovered within three months, hardly long enough to justify a panic stock dump. Bear markets have typically regenerated in 20 months or less.
Here’s another factoid: The S&P 500 (SPX) has sunk into bear market territory 12 times in the last 70 years but is still up nearly 15,000%, according to The Wall Street Journal. In other words, Lesson #1 on the confidence/ambiguity meter is to not let market gyrations upend your investment strategy.
That doesn’t mean, of course, that every stock investment will pay off. You have to do your homework to learn about various types of investments, stock and economic fundamentals, and outlooks on individual companies and investment funds.
Another notch on the “certainty” post is to keep the asset allocation of your portfolio properly balanced, relative to your risk tolerance. Again, stocks historically have done well over time, but don’t bet the house on them. Consider what type of stock mix might make the most sense. Cash and bonds, with their lower but sometimes more predictable longer-run returns, may be the yang to the yin of turbulence in the stock market. Foolproof? Nope. Even cash is not always a lifesaver, taking into account that its value will erode over time due to inflation. Plus, there’s always the risk that a portfolio dedicated to cash for too long risks missing opportunities in the stock market.
Keep in mind that although diversification does not guarantee against investment loss, diversification among stocks lets you spread your investment across different assets and markets, limiting wild swings both up and down. Exposure to defensive sectors, for example, including health care and consumer staples, may work toward protecting you on the downside when the higher-growth, higher-volatility sectors like technology or housing fizzle.
Market veterans, including Kinahan, have weathered long stretches of stock markets moving in both directions. His bottom line: Worry less about certainty and more about securing a degree of confidence that your portfolio will carry you through the rough patches.
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