Worried about your investments? Top 3 tips when headlines sound hopeless
When you are scrolling on your phone or watching TV there is no shortage of bad news, and while it makes sense to be worried, should you also be worried about how all this bad news will affect your investments?
Here are my top 3 tips for you when you are worried about what to do with your investments when it seems like everything in the news is doom and gloom.
First, Uncertainty is Unavoidable.
Remember that uncertainty is nothing new and investing comes with risks. It’s exactly because of this uncertainty that disciplined investors have experienced higher returns over time. Let’s take a look at the major events during the last almost 4 years. From January 1st, 2020 through September 30th, 2023 we have experienced a global pandemic, the Russian invasion of Ukraine, spiked inflation, the biggest bank failure since the Great Recession, and ongoing recession fears. Despite these concerns, during this time period, the Russell 3000 Index, a broad market-cap weighted index of 98% of the publicly traded US companies, generated an almost 9% annualized return (8.96%). That means if you invested $1,000,000 on January 1st, 2020, you would have $1,379,300 on September 30th, 2023. These past few years certainly make the case for weathering short-term ups and downs and sticking with your long-term plan.
Second, Market Timing is Futile
Market timing is the idea that you can sell out of your investments before their value goes down and buy back into the market when prices are low (which also happens to be when everyone is panicked and selling). The idea of market timing sounds very seductive, using a tactical strategy to avoid any short-term pain while still capturing long-term gains.
It reminds me a lot of "skinny tea", you might have gotten Facebook or Instagram ads advertising that if you drink this tea, with no diet or exercise, you can lose 20 pounds in a month. Does it sound attractive? Yes! However, if such a magic tea existed wouldn’t everyone be drinking it, and no one would be overweight?
The same goes for market timing. Research has shown that there are no repeatable strategies to avoid short-term losses while still capturing long-term gains. If such a strategy existed it would be widely known and consistently executed in investment funds and portfolios.
Third, Diversification is Your Friend.
Instead of owning just one stock, or even a handful of stocks, you can own a globally diversified portfolio with thousands of stocks from companies all around the world, this is called diversification. Diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.
Looking back on the banking crisis at the beginning of 2023 you can see how this would have played out. If a large percentage of your portfolio was made up of the individual company Silicon Valley Bank, that percentage of your portfolio would be worthless. However, Silicon Valley Bank only represented .04% of the Russell 3000 index, and regional banks represented approximately 1.7% of the Russell 3000 index. A diversified approach such as this would leave a long-term investor relatively unscathed.
When you listen to the news, especially bad news, you might feel like you need to be doing something with your investment portfolio. If you are investing for the long-term though, it is more important to create a financial plan based on your personal goals and needs. While every investor’s plan is going to be a bit different, ignoring headlines and focusing on these time-tested principles may help you to avoid making short-sighted mistakes.