Tune out short-term volatility
Investing in the stock market can sometimes feel like a roller coaster. Over the long run, however, it has generally traveled in one direction—up. Bouts of short-term volatility are normal, but if you look at the history of the market, they have typically been speed bumps along a path of long-term growth.
When thinking about your invested assets, ask yourself: Do I need that money today or in the near future? If the answer is no, then worrying about the present value of your portfolio may not be very constructive.
As a long-term investor, there are inevitably going to be periods when your confidence might flag a bit. You need to be thinking about what’s likely to occur in 10 years, not what’s going on today. It doesn’t make sense to allow these short-term events to influence your long-term plan.
If you’re worried about market performance over the next few months, you may be inclined to take your money out of the market and wait till things improve. But how will you know when to get back in? Historically, this approach has been very unlikely to be successful. It’s difficult, if not impossible to time the market so that you avoid the downside and are able to reinvest at the right moment to catch the upswing.
Don’t chase returns, look for growth opportunities
It can be hard to pass up potential returns when a particular asset class, such as stocks, is performing well, but for many investors, it may be wiser to prepare for the future by seeking out opportunities elsewhere, in asset classes whose benefits may become more apparent down the road.
Investors may want to take the opportunity to exercise a little risk management and layer in some safety, because things can always change and it’s important to be prepared for it.
One key to riding out the market’s rocky periods is to establish a well-diversified asset allocation in your portfolio, one that factors in your goals, risk tolerance, and time horizon. With a plan like that in place, you’re more likely to have the perspective necessary to shrug off the occasional downturn. In fact, research shows that the strategy of selecting the percentage of stocks, bonds, and cash in a portfolio can be said to be responsible for more than 90% of the variability in portfolio returns.
If you become too concentrated in a particular asset class when it’s on the upswing, you may struggle to maintain your resolve in the event of a significant downturn. By spreading your assets out more, you can potentially reduce the likelihood that your portfolio is seriously affected by volatility in any one asset class.
Broaden your horizons with international stocks
One way to help build in that layer of preparation is by investing in companies that are based in different parts of the world. Though they come with their own set of risks and volatility, investing in overseas companies could potentially offer growth opportunities and help serve as a way to diversify your portfolio.
International stocks may offer many long-term growth opportunities that are unavailable in the US. Furthermore, exposure to international stocks as part of a hypothetical diversified portfolio has historically led to strong long-term results and lower volatility. Between 1973 and 2023, a balanced stock allocation comprising 70% domestic and 30% international stock delivered similar returns to a 100% domestic stock allocation, but with more modest ups and downs over time.
So far this year, US stocks have lagged international stocks, which might come as a surprise given the discussion around tariffs. Furthermore, international stock valuations have lately been close to their 20-year averages, while domestic stocks have been higher than average. Historically, lower stock valuations have sometimes been associated with above-average returns. Even if domestic stocks were to perform well, the lower valuations on international stocks may potentially offer a different return profile.
Given the potential impact of tariffs and other ongoing geopolitical concerns, investors may want to consider investing assets overseas, particularly in regions like Asia and Latin America, where there are a variety of businesses that may be less affected by these matters.
Some of the most profitable companies in the world are based outside of the United States, including many of the top consumer brands and pharmaceutical companies. Restricting yourself to US stocks means potentially missing out on some major components of the global economy.
Strike a balance with bonds
Investments that are less correlated with stocks, such as bonds, can help keep your portfolio on an even keel when the markets are choppy. Bonds have historically maintained or even gained value during most periods of stock volatility. We generally add bonds to a diversified portfolio to provide both income and stability, as they typically experience lower volatility.
While longer-term bonds are typically more exposed to concerns over shifting policy expectations, shorter-duration bond funds could be an option for investors who are interested in diversifying their assets, as they have historically been less sensitive to uncertainty.
Bonds have also historically been considered a less risky investment compared to keeping your money in cash. We’ve seen that when bonds are offering yields between 4% and 6%, as they are currently, their forward returns outpace cash over time.
Remember: It's a marathon, not a sprint
If you want to improve your chances of reaching your long-term goals, you need to stay focused on the finish line. To do that, you have to work on building your endurance.
Here are some ways you can prepare your portfolio to go the distance:
• Think about investing defensively by including more conservative stock investments, high-quality bonds, and alternative investments that are less correlated to the performance of traditional asset classes. This may result in shallower dips in your portfolio when the broader market is in decline.
• Take steps to manage your reactions to movements in the market. Understanding why we are prone to react emotionally to market volatility is the first step toward recognizing those feelings and holding them at bay.
• Working with a financial professional may provide you with the support necessary to more rationally assess market conditions and determine whether it’s the right time to adjust your strategy. Your professional may also play a role in ensuring that your portfolio is appropriately allocated and diversified over time.
• Whatever strategy you choose, you may be best served in the long run by staying in, spreading out, and sticking to your plan.
