The 9% drop in the US stock market over the past two months is hard to miss. Although I don’t know if the market will continue to decline from here, it is important to be ready for a further decline. Here are three considerations for your portfolio:
First, own broadly diversified mutual funds instead of individual stocks that have the potential to go bust or lag the rest of the market for years. Some companies may not survive the downturn, but they will only represent a small fraction of your overall portfolio if you use mutual funds holding hundreds of individual stocks. Admittedly, holding these types of funds isn’t as exciting as bragging about your latest stock pick, but it’s also more likely to lead to long-term financial success.
Second, keep enough money outside of stocks to avoid having to sell stocks at a loss. We generally recommend 6-8 years in cash and bonds, preferably in high-quality, short-term bonds. One of the trade-offs of owning these types of bonds is that the interest income will be lower, which I believe is a worthy alternative to riskier bonds yielding more interest which could see their value drop. simultaneously with the actions. While no one likes to see the value of their investments decline, patience will eventually reward investors when stocks eventually rally.
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Third, maintain a realistic perspective. According to Vanguard.com, the worst year for the stock market was 1931, when the market fell more than 43%. Coincidentally, the best year was just two years later, in 1933, when it rose more than 54%. Selling after the decline would have prevented you from participating in the eventual rally. Recognizing that your stock holdings should be held for years (decades?) rather than months alleviates some of the difficulties along the way.
If you find it hard to bear the thought of seeing your portfolio drop 30-40% (or sold before after a big drop), it’s even more important to make adjustments now so you don’t find yourself in a situation again. worse.
Your guess is as good as mine when it comes to financial market developments (including the long-term impact of the war in Ukraine), but that doesn’t mean you’re powerless to control your financial future. Being patient, diverse, and not holding too many stocks might sound like basic advice, but I’m regularly surprised at how often people don’t buy into these simple concepts, leading to stress and financial loss. unnecessary. A quick review of your investment portfolio will help you determine if any of these considerations are worth implementing to increase your financial peace of mind.
Justus Morgan is a fee-based financial planner with Financial Service Group Inc., an investment advisory firm registered at 4812 Northwestern Ave., online at www.ToYourWealth.com