Three ways to keep market uncertainty in perspective
seems like headlines these days keep announcing markets have hit yet another all-time high. And while it's worth celebrating good days like this, not every day is going to be the same.
When it comes to investing, the biggest elephant in the room is the word "uncertainty." No one can say for certain what the markets will do, and there's no crystal ball that'll show you the outcome of any situation.
Instead, investors fare best when they focus on the factors they can control.
Here's 3 things you can do to help maintain perspective through market uncertainty.
1. Consider the market information you receive (and act on)
Start by evaluating the information you regularly get and how it impacts your day-to-day decisions. Most information today, even those from what we consider to be a "trusted source," is shared with some kind of intention.
Think about the spheres of influence within your life. Beyond family, friends, and coworkers, you likely have other information sources such as social media, emails, or news stories. Everyone's inner circle may be different, but even your friends' spiciest takes can be less chaotic than headline articles you see lining your feed. So how do you decide what's worth listening to and what's worth acting on?
First, you'll want to approach the information you're getting with purpose. Don't be afraid to ask yourself some tough questions like:
- What's the intent of this information?
- Is this information meant to inform me or to evoke a reaction?
- Does this information change my outlook on what's happening in the markets?
Second, try seeking out a new perspective. Maybe this means speaking with a financial advisor or someone else you trust. Avoid those with a perpetual "sky is falling" mindset. Talking with someone who has your best interests in mind can help you reframe what's happening in the economy and why it should matter to you.
2. Make it your goal to invest with purpose
Goal-based planning is the bedrock of Vanguard's investment philosophy, so when you're uncertain, remember your overall game plan. What's your goal? The answer shouldn't be something quantifiable, such as "Get a 10% return each year." Sure, there might be years in which you accomplish that, but there will also be years where that won't happen. That kind of thinking is bound to disappoint, and when your expectations aren't met, it can be tempting to seek change by tinkering with your portfolio.
The most important way to avoid falling into this trap is to invest with purpose. Are you investing for a specific short- or long-term goal? If so, how's this portfolio going to support you in attaining that goal? Is it enough? If it is, there's no need to obsess over rates of return at the end of each year, and there's no need keep chasing after more.
Maintaining diversification in your portfolio can be a difficult process. For instance, there may be parts of your portfolio that might not grow at different points during the month or even the year. If the equity component of your portfolio is growing at a rate of 11% but your fixed income is only growing by 3%, you might be tempted to leave bonds altogether. Resist the temptation. A portfolio with purpose focuses on asset allocation to provide steady long-term return and dampen the impact of unexpected volatility. It also focuses on asset location to reduce tax burden and help you keep more of your return. Most importantly, a portfolio with purpose is built around you and your needs.
3. Take it easy on yourself when losses happen
Rather than charging in like an angry bull at the sight of red in your portfolio, take a step back and breathe. Maybe you've missed out on an investment opportunity or your portfolio's value dropped as a result of a market swoon. Keep in mind that these losses happen. Don't be too hard on yourself. Instead, use these moments as opportunities to look at the big picture.
Between 1980 and 2019, for example, there were 8 bear markets for shares (declines of 20% or more, lasting at least 2 months) and 13 corrections (declines of at least 10%).* Unless you sell during a downturn, the number of shares you own stays the same. And if you reinvest your funds' income and capital gains distributions, the shares you own continue to increase over time. In the event of market recovery, having more shares can help revitalize your portfolio more quickly.
It's often been said that history has a funny way of repeating itself. And there's a lot of history in the investment world that you can learn from, and be ready for what happens next time around.
28 Sep, 2021