There is a line from The Psychology of Money by Morgan Housel referring to the stock market that strikes a chord with me. It reads, “You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines and always will be. The idea that something can gain in the long run while being a basket case in the short run is not intuitive. But it’s how a lot of things work in life.”
Daily headlines and market news can challenge your investment discipline and many of these “basket case” scenarios can stir anxiety about the future.
Based on my experience, the issues causing the market to be a short-term “basket case” change continually. This year it has been the presidential election, the Israel-Hamas war, and continued concerns about inflation, among other things. Last year, some of the big headlines were the collapse of Silicon Valley Bank, the escalation of the war in Ukraine, and ongoing recession fears. Before that, it was the coronavirus pandemic. Often, I hear, “Well, we’ve never experienced THIS before,” which is true; but we HAVE experienced many different events that have had similar effects on the market.
I have learned that in times of stress, the most reliable recipe for your portfolio is to stick to a set of fundamental investment principles while keeping a long-term focus.
Create a financial plan
Building a financial plan with your long-term goals in mind and based on principles you can stick with is key to navigating short-term events and will help you avoid making shortsighted decisions. It is important to work with a financial advisor to craft a plan that considers your investment timeline and level of risk tolerance for the long term. Knowing you have a plan in place that is guiding your investments for the short term and long term may keep you from changing your strategy based on your “gut feelings” during times of instability.
Avoid the urge to time the market
The idea of using short-term strategies to avoid near-term pain is seductive, but research shows that market timing strategies are not effective.
Not only must you predict when to get out of the market, but the second part of that equation is that you must know when to invest back into the market too. The unfortunate reality is that most of us don’t get out until the market has begun the descent (thereby selling low) and don’t reinvest until the market has recovered somewhat and we feel confident again (buying high).
Missing only a brief period of strong market performance can drastically affect your lifetime wealth. There’s no proven way to time the market — targeting the best days or moving to the sidelines to avoid the worst — so my recommendation is to stay invested through good times and bad.
Diversify
Diversification is an incredibly effective tool for reducing many risks investors face. In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.
Through “landmine” market events, we have seen specific sectors that were hit especially hard. During the tech bubble burst, technology stocks fell more than 50%, and communication companies were significantly impacted. The financial crisis of 2008 affected the real estate, financial, and construction sectors. During the coronavirus pandemic, the travel, food services, and automotive industries experienced significant negative financial impacts.
If your portfolio was heavily concentrated in these sectors during those particular market downturns, your investments would have been negatively impacted more so than the market as a whole.
A well-diversified portfolio spreads your investments across multiple asset classes that move in different directions, which reduces the fluctuation in your performance. This reduces your chances of experiencing large losses that may result from a less diversified portfolio.
Keep politics out of your portfolio
Because the presidential election is one of the biggest headlines of 2024, I will caution you to avoid making changes to your long-term plan based upon politics in general. It is natural to look for a connection between who wins the White House and which way stocks will go, but shareholders are investing in companies — not political parties. Companies are focused on growing their business and serving their customers no matter who is in the White House.
Stocks have rewarded disciplined investors over the long term through both Democratic and Republican presidencies. Making investment decisions based on the outcomes of elections or how you think things may unfold may lead to costly mistakes.
In conclusion, you may never escape the anxiety that is felt with the current news headlines or the short-term fluctuations of the market, but if you can stick to these fundamental investment principles and remember to keep a long-term perspective, you will be better prepared to avoid the negative impact of landmines and basket cases on your investment portfolio.
Lyndsay Goody, MBA, CPA/PFS, CFP® is a financial advisor with Onyx Financial Advisors, LLC, an independent, fee-only, registered investment advisory firm located in Idaho Falls, Idaho. She can be reached at (208)522-6400,