In the face of resurging FOMO-driven market concerns, experts caution against potential pitfalls. While the S&P 500 rides high on strong earnings and lower inflation, worries linger about a melt-up fuelled by select stocks. Seasoned investors advocate resilience amid market fluctuations, citing historical recovery speed and the inevitability of downturns. Diversification proves a shield, emphasising the need to understand portfolio composition beyond S&P 500 exposure. Strategic rebalancing and creating investment “buckets” aligned with goals and time horizons emerge as key tactics for weathering market volatility.
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By Suzanne Woolley
The return of FOMO is fueling concern that the market may take a tumble. ___STEADY_PAYWALL___
Strong earnings and an overall downward trend in inflation have helped fuel a surge in the S&P 500 that few would want to miss. But with much of the indexâs 30% rise over the past 52 weeks stemming from just a handful of stocks like artificial-intelligence play Nvidia Corp., some market watchers fear there may be a melt-up unfolding.
Below, market veterans and financial advisers offer tips on how to navigate choppy markets and create a portfolio you can stick with. Declines, inevitably, happen. But thinking through the potential impact of a drop can help guard against making any rash moves. So hereâs what to keep in mind.
Markets Tend to Recover Quickly
To keep market drops in perspective, Sam Stovall, chief investment strategist of CFRA Research, suggests using stock market history as âvirtual Valium.â
âWhat amazes me is how long people think it takes to get back to breakeven from a correction, or from a decline of from 10% to 20%,â Stovall said. âMost people would say years, but on average it takes about four months.â
The speed of market bounce-backs argues against trying to time the market. Also, with market-timing you have to be right both on when to get out, and when to get back in. Often people talk themselves out of getting back in, fearing that a bullish move could just be prelude to another drop, said Stovall. Missing a handful of top-performing days can have a big impact on long-term returns.
Downturns Are Normal
Just as hitting new highs is normal for a well-functioning stock market, so are downturns.
âTo be a disciplined investor, you have to accept ahead of time that even in good markets, it will not continue indefinitely â markets do drop,â said Rob Williams, managing director of financial planning at Charles Schwab. âThe good news is that they generally recover, and the general direction of the markets continues to be up.â
A Schwab analysis looked at intra-year stock market declines over the 20 years from 2002 to 2021. There was a drop of 10% in 10 out of the 20 years, so half of the time, and the average size of the pullback was 15%. In two additional years, the decline was nearly 10%.
It sounds stressful, but the good news is that in most of those years, stocks were up, and the average gain was approximately 7%, according to Schwab.
Diversification Is Protection
The S&P 500 looms large, but most people donât have all their money in the index or the mega-cap tech stocks driving its performance.
Whether you use a financial adviser or have exposure to the stock market through a target-date fund (TDF) in a workplace 401(k) retirement plan, your stock holdings are likely more diversified than you may think.
âWe continue to educate and remind clients that they are not simply invested in the S&P 500 [and mega-cap tech], where there is significant volatility, emotional trading and inherent risk, as evidenced by declines in those stocks in 2022,â said Laura Mattia, founder of Atlas Fiduciary Financial. âWhile large-cap US stocks may comprise a portion of our clientsâ investments, their overall portfolio is well-balanced across various asset classes which are not overinflated.â
Finding out how your TDF is invested can be reassuring to know if the market drops, and is easy to find out by simply googling a fund, looking on your 401(k) planâs website, or searching for a fund on Morningstar.com.
Anyone nearing retirement in the Fidelity Freedom 2030 target-date fund (FFFEX), for example, had some 56% in stocks as of yearend 2023. But it wasnât parked in just the S&P 500. Stock exposure was spread over index funds across geographies and styles, including international, growth, value, large-cap, and small-cap stocks.
Meanwhile, younger investors in the Fidelity Freedom 2055 fund (FDEEX) had 83% in equities â again, spread out across geographies, market capitalization and value and growth styles. Theoretically at least, younger investors should welcome downdrafts as times to buy more stock at lower prices. (If youâre in a 401(k) and stay fully invested, your regular contributions will do just that.)
Rebalancing Reduces Risk
If you or a financial adviser have set an asset allocation for your portfolio, like the classic 60/40 split between stocks and bonds, your portfolio may be out of whack given the marketâs rise. Your portfolio was designed to reflect your goals and the time horizons attached to those goals, so bringing percentages back in line keeps you on track.
Selling appreciated stock in a taxable account does mean paying capital gains taxes in the following year, but it locks in gains and lowers risk in a portfolio. You may be able to offset those gains by doing some tax-loss harvesting to realize losses.
Schwabâs Williams suggests rebalancing once a year. âIf you rebalance more frequently you may be overreacting to market moves,â he said.
You Can Build a Buffer
Many financial planners manage client money in different â bucketsâ earmarked for different goals and time horizons.
A bucket for shorter-term needs will be invested conservatively. For someone nearing retirement who will need to tap savings for expenses, that bucket would be one to three yearsâ worth of low volatility bonds such as Treasuries or high-quality bonds with short durations, said George Gagliardi of Coromandel Wealth Management.
There will be a medium-term bucket, perhaps to fund a childâs college, and a longer-term bucket for retirement money. If you have decades to retirement, that bucket will be heavily in stocks so you get their higher long-term growth and beat inflation. Since you have the short-term bucket to tap for immediate needs, you shouldnât need to touch that long-term money and can avoid selling stock into a downturn.
Read also:
- Magnus Heystek urges South Africans: Go global or risk a âLost Decadeâ in investments
- đ Decoding the implications of Bezos and Zuckerbergâs stock sales: Jonathan Levin
- Revisiting Ginsbergâs brilliant Nov â22 tech stock call â says boom not over
© 2024 Bloomberg L.P.
