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How to ride out a rocky road for stocks and bonds
Financial markets have experienced a bumpy ride so far this year. Rising interest rates and soaring inflation have shaken both stocks and bonds, and stocks in particular have been impacted by international conflicts and supply chain disruptions. Here are some guidelines to help investors navigate uncertainty in the market.
1) Stay true to your goals
Remember that your goals – the things you’re investing for – are set by you, not by the markets. For example, your goal might be to send your child to college or university in 10 years, or to retire in 15 years. An investment mix, the blend of stocks, bonds and cash in your portfolio, is typically designed around those goals.
Retiring decades from now? Then your portfolio has longer to weather ups and downs in the market and can include investments that fluctuate in value over the short term.
Saving up for a vacation this winter? Then the money may need to be more secure over the short term. Think about these goals and ask yourself if they’ve changed.
2) Use your risk tolerance as your compass
Much like turbulence on an airplane, sudden swings in the market show us how comfortable with risk we really are. So how do you decide how much investment risk is right for you? That depends on both your ability and willingness to take risk and how these relate to your goals.
Ability to take risk
This often has to do with how soon you need access to your money. For example, if you decide to retire a few years earlier than planned, you’ll likely be relying on income from your investment portfolio to fund your retirement. In that case, you probably don’t want big swings in your account balance from year to year so you may want to consider a more conservative investing strategy.
Willingness to take risk
Essentially, this is how much uncertainty you can stomach. If you’re losing sleep over your investments or checking your account balance frequently, this might be a sign that you’re not comfortable with your current investment portfolio.
What do you do if your ability and willingness to take risk are different?
Let’s say, for example, you have 20 years until retirement and a stable income (you have a high ability to take risk) but you realize you’re quite concerned about ups and downs in your investments from month to month (you have a medium willingness to take risk). Your true risk tolerance is whichever is lower (in this case, medium risk).
Dialing down your risk level
If you need to reduce your risk level, you might want to adjust your mix of investments between stocks, bonds and cash. Or you might want to leave your mix of investments the same and adjust the type of investments you hold. This could mean changing how much emphasis you place on income versus growth potential in the stocks you choose, or shorter versus longer maturities in the bonds you hold. Remember that these changes shouldn’t be made on impulse, since lower risk can mean lower return potential over the long term. Unless you feel strongly that you’re taking too much risk, consider changing the type of investments before changing the mix of investments.
3) Set up a regular investment plan
Wobbly markets make it less attractive to invest lump sums, such as annual bonuses or family gifts all at once. Rather than investing later or not at all, you could move forward steadily with a regular investment plan. For example, say you have an annual bonus of $6,000. Instead of investing the full amount right away, you could invest $500 each month for the next year. Investing smaller amounts over time can help remove the emotion from investing and potentially reduce the effect of market ups and downs through dollar cost averaging.
A moment to reflect, not react
This has been a volatile year so far, which gives investors a chance to reflect. Start by reviewing your situation and asking if your goals have changed as a result of market movements. Then consider your ability and willingness to take risk, to see if you need to make any adjustments to your investments. Continue investing through a regular investment plan, which can help to reduce the effect of market movements on your portfolio.
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This document is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice. It should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to.
Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. You should not act or rely on the information without seeking the advice of a professional. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.
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