What Should Investors Do During Periods of Uncertainty?
Financial markets have had a rocky start to the year. As we discussed in our 2021 Q4 Quarterly Market Commentary, 2022 will potentially be a volatile year where we see a tug-of-war between economic growth pulling the market in the right direction, while the ongoing pandemic, high inflation, and the Fed’s interest rate hikes pull the market in the other direction.
While major stock market indexes have fallen the first few weeks of this year, long-term investors have seen episodes like this many times before. Rather than focusing on short-term market news, it is more important than ever for investors to focus on their long-term financial goals and objectives.
History shows that staying invested with an appropriate portfolio has been the key to long-term success. Doing so helps investors capture the upside as markets rise over long periods and helps investors avoid the temptation to jump in and out of markets when daily or weekly swings occur.
Three Key Reminders for Investors During Periods of Uncertainty
1. Short-term stock market pullbacks are normal, can happen at any time, and are not a cause for panic. There are typically four or five market pullbacks of 5% or larger each year that tend to fully recover within weeks or months. Risk and reward go hand-in-hand.
2. Even without the high inflation we are currently experiencing, the Fed would be expected to raise interest rates at this stage in the business cycle. However, this often requires a period of adjustment which the market is undergoing right now. This was true in 2013 during the Fed taper tantrum, in 2015 when the Fed announced its first rate hike that cycle, last year when the Fed was expected to taper again, and so on. History shows that once markets and businesses adjust, interest rates tend to rise alongside the economy. The Federal Funds rate (blue line) does not necessarily affect the stock market (red line).
3. While many factors have pushed markets to ever-higher levels over the past couple of years, investors should have realistic expectations for the economy and markets. Although higher than average levels of GDP growth and job gains kicked off the economic recovery, the next few years could experience more modest levels of growth. Broad market valuations remain high but should improve over time if earnings grow (see our 2021 Q3 Market Commentary: P/E Compression).
Investing for the Long Term Pays Off
History shows that it is often better to simply stay put in well-constructed portfolios. Over the past 25 years, the hypothetical average investor that held onto their stock allocation gained at least twice as much as an investor who tried to time the markets (Source: Clearnomics). Because markets tend to recover unexpectedly and rise over time, the longer an investor stays out of the market, the more upside they potentially miss.
The timing of market swings is impossible to predict but the fact that they occur is a certainty. As a long-term investor, your best course of action is to stay invested in a portfolio specific to your financial plan through both good times and bad.
Summary
- Short-term market pullbacks are normal and inevitable.
- Investors who focus on their financial goals and objectives over years and decades rather than market swings over the course of days and weeks are more likely to be successful.
GreenUp Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
