Investing in wartime
Stocks these days are much like the weather – only much harder to forecast.
For one hour of a trading day, you might be tempted to sit back and relax in the sun. But the next hour, you’ll wish you left home with an umbrella as stocks start plunging.
Much of that volatility is resulting from Russia’s invasion of Ukraine. Research shows that acting on emotional impulses during heightened stock market volatility, and in general, has rarely been a good strategy.
At the same time, doing nothing can leave you feeling like a sitting duck as stocks seesaw.
Instead, the best advisers say now is the time to hit the reset button on your portfolio and ask yourself three crucial questions:
What are my investment goals? There are endless reasons why people invest besides earning more money. Perhaps you’re looking to buy a house, fund your child’s college education down the road, or be able to retire comfortably. Whatever the reason, consider when you expect to make use of the money you’re investing. For instance, if you’re not planning to touch the money for another five to 10 years, then what difference does it make if stocks are down 10% since the beginning of the year? Historically, market corrections (those 10% drops) tend to be short-lived, and in the long run, stocks have positive returns.
What is my tolerance for risk? It is no secret that taking on a lot of risk by investing in assets that are prone to big price swings, like commodity futures, or are hard to sell off, like real estate, can often mean reaping higher rewards than playing it safe. But it also means you’re vulnerable to losing more money. It’s one thing to say you've got a high-risk tolerance, but it's another when you have volatility in your portfolio and it’s making you uncomfortable, then you probably need to take a step back and reassess your risk tolerance.
What’s the risk of avoiding risk? First and foremost, evaluate what it is that unnerved you, and made you consider safer investments. If it's a deep drawdown like we've had here in equity prices, is now the best time to be selling into this environment ... or might there be a better time? If you determine that you’re taking too much risk and want to move into safer assets like bonds, consider that there's risk in all investments. If we stick to cash, for instance, we’ll get punished by inflation.
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