By Monica Chandra, CFP ®, Financial Advisor
Monica is a Certified Financial Planner ™ and advises Members at our Santa Ana branch.
The stock market can rise and fall on world events. Bad news can send it plunging as investors panic and sell off their investments, while good news keeps them active in the market. Sometimes referred to as a roller coaster, the market can be a ride many are nervous taking, particularly when it goes south. But common sense says you wouldn’t jump off a ride midway through, no matter how scary the dips. That could be disastrous. Still, weathering volatility can be an extremely emotional journey for many.
Understanding Market Corrections
One of the hardest events for investors to stomach are market corrections. A correction is a dramatic drop of 10% or more of a stock, bond, or market index such as the S&P 500. The most recent correction is over fears of the coronavirus spreading and its potential impact on the economy. However, corrections tend to be shorter in duration and less severe than bear markets, lasting around three to four months.
Corrections aren’t unusual, although many investors act as if they are, each and every time they occur. In fact, since World War II, there have been 27 market corrections to the S&P 500 Index1.
What’s an Investor to Do?
There’s a saying that doing nothing is doing something, although that’s not advice many investors consider. However, making rash decisions during market turbulence is like jumping off that roller coaster midway through. That’s why it’s important to establish an investment strategy. Start by identifying your investment goals, risk tolerance and investing time horizon, then use this information to tailor your portfolio’s allocation. It’s also wise to review your investing mix and criteria at least annually, because you may need to change your initial portfolio allocation. Before making any changes, keep in mind that your investment criteria may actually be more important than large shifts in the market. At SchoolsFirst FCU, we have a team of financial advisors2 who can assist you to create an investment strategy.
Your investment portfolio may include a mix of stocks, bonds and cash to help manage risk. This is known as asset allocation and can help you weather the market’s gyrations and take advantage of its upturns. That’s because each asset tends to behave differently depending on how the market is behaving. For instance, in general, when the market is down, bonds perform better and when it’s on an upswing stocks do. While stocks come with more risk, the average returns historically are much stronger. Cash or cash equivalents such as money market accounts, share certificates and treasury bills offer safety, but usually offer the lowest returns over the long run. So spreading your money across these asset classes will help you balance both risks and rewards. One simple way to achieve diversification is by investing in mutual funds, accounts that are managed by experts whose primary jobs are to determine the right mix of stocks and bonds based on their funds’ objectives.
Understand Your Investing Persona
While it’s all well and good to be told you shouldn’t panic when the market has its moments, knowing your risk tolerance when investing is critical. By knowing your own limitations, you can create an appropriate asset allocation and achieve your long-term financial goals.
For instance, are you a worrier? Do market drops send you straight into the fear zone? Or are you a risk taker, seeing market drops as a buying opportunity? Maybe you’re somewhere in the middle, willing to stay the course as long as your risks are minimized as much as possible. Your risk tolerance is unique to you and your situation, so it may differ from someone who may share similar goals and investing time horizon.
Regardless of your risk tolerance, if you have a longer investing time horizon you can generally be more aggressive with your investments. That’s because you have more time to weather the market’s storms and make up for any downturns that might occur. As you grow closer to the time when you’ll need to use the money you’ve invested, you should adjust your investing mix to be more conservative to preserve what you’ve earned.
The truth is, you can’t control the market, but you can control the decisions you make. And having a sound strategy that guides you when things turn rocky will help you keep a clear head and stay the course.
We’re Here to Help
Investing can be challenging at times but our financial advisors2 can answer your questions and help you create a common-sense investment strategy based on your unique investment criteria. Whether you’re saving for retirement, a home, or your children’s college education, we can help you find solutions that work for you.
Visit schoolsfirstfcu.org/advisors to learn more.
- Source: CNBC 2. Financial Advisors are registered representatives of CUNA Brokerage Services, Inc. Representatives are registered, securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, which is not an affiliate of the credit union. CBSI is under contract with SchoolsFirst FCU to make securities available to Members. Not NCUA/NCUSIF/FDIC insured, may lose value, no financial institution guarantee. Not a deposit of any financial institution.CUNA Brokerage Services, Inc. is a registered broker/dealer in all fifty states of the United States of America.
When you click on external links, you are linking to alternate websites not operated by SchoolsFirst FCU, and SchoolsFirst FCU is not responsible for the content of the alternate websites. The fact that there is a link from SchoolsFirst FCU’s website to an alternate website does not constitute endorsement of any product, service, or organization. SchoolsFirst FCU does not represent either you or the website operator if you enter into a transaction. Privacy and security policies may differ from those practiced by SchoolsFirst FCU, and you should review the alternate website’s policies.
Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or GreenPath Financial Wellness counselor who can help tailor a solution for you.
If you post a comment, we will make every effort to respond or contact you directly. We reserve the right to delete comments that contain personal information, unauthorized content, or are generally inappropriate.