How to Look at Markets Without Losing Your Head
The COVID-19 pandemic has affected stock markets dramatically. There has been greater volatility than in recent memory. These unpredictable fluctuations are enough to scare any investor—and perhaps even cause a little panic—leaving you to wonder how to react.
It’s important to keep calm—especially with regard to making money moves. Reacting quickly to daily turmoil can end up burning you—both short and long term. Here’s what to know about looking at markets now and thinking about your financial future without stressing yourself out.
Think status quo
Before you contemplate your next financial move, examine your cash flow you are using to meet your current expenses. Your impulse may be to react to a market downturn in real time, but is it the right move? If you are still employed, or if you are retired and your income producing assets are not tied up in the market, your cash flow may actually be unchanged despite the doom and gloom on Wall Street.
If you haven’t seen signs of fluctuation in your cash flow, you might not want to make any sudden moves. You may even find solace in the status quo.
It is important to know how your assets are allocated before you make any portfolio adjustments.
If your portfolio skews more heavily toward fixed income and money market investments, you will have less direct exposure to volatile equity market conditions than a stock-heavy portfolio. Conversely, an equities-heavy portfolio may incur more risk and volatility. Understanding your appetite for risk can help you select the proper asset allocation.
Ask yourself what type of asset allocation best suits you.
Aggressive: Greater exposure to the highs and lows of the market; typically leans heavily on stock performance to drive growth; may stand to gain an outsized return when stocks do well, but has a greater risk of lost value if stocks slip.
Moderate: More balanced allocation between stocks and fixed income investments; less exposure to stocks when compared to an aggressive stance. Less risk, but lower potential of returns.
Conservative: A majority of fixed income and cash investment with, perhaps, a small exposure to stocks. The least amount of risk but lowest potential for returns.
Also consider if active or passive management may be more appropriate for you.
Active Management: Seeks to outperform market indexes. May help your portfolio outperform against the market, but tends to have higher management fees.
Passive: Seeks to match a market index. Generally has lower management fees, but you may miss out on opportunities to outperform the market.
Not all investments are created equal—nor do they experience the same rises and falls when the market begins to shift.
Stay in the markets
Recent market moves may have affected your assets. While there is no way to undo the economic impact of COVID-19, consider ways to help enhance your portfolio’s growth.
It is important to stay invested. Investing requires a long-term view that can absorb and ride out periods of financial downturn. Withdrawing from positions can lock in losses, but maintaining your holdings could potentially reap dividends when the market improves. Your financial professional can help you build a diversified portfolio designed to help weather these kinds of events.
Consider the short term
Although long-term investing is the goal, you may have short-term needs to consider. Short-term liquidity is essential—especially if you or your work has been impacted by recent events. Examine your short-term needs and emergency fund requirements to help you make the best determinations.
Make a realistic budget based on your current expenses and income. Knowing how much money you need to manage your personal expenses will help you determine how much—if any—money is available to invest.
Consider deferring on investments in long-term products such as CDs, long-term bonds, or other investments that penalize you for withdrawing on short notice. Having quick access to cash can make it easier to react swiftly if your financial scenario changes.
The next few months—and maybe even years—may hold quite a bit of uncertainty. Your ability to assess each day with a level head will help you when it comes to being in your best financial position. M&T Securities Financial Advisors are a great resource for helping you navigate complex financial waters.
Investing involves risks and you may incur a profit or a loss. Asset allocation/diversification cannot guarantee a profit or protect against a loss. Past performance cannot guarantee future results.
This article is for informational purposes only. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.
There is no assurance that any investment strategy will be successful.
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