Investing

This 'tried and true' strategy helps protect your long-term money goals, especially when markets are volatile, CFP says

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Key Points
  • "It is okay to be nervous, but do not panic and react," says Marguerita Cheng, a certified financial planner and the CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. 
  • This selloff is "a reminder to stay diversified," says Ryan Detrick, Chief Market Strategist for LPL Financial.
  • "Equities are important because even though they fluctuate in the short term, they appreciate at a rate greater than inflation over the long term," Cheng says.

Stocks rallied Monday afternoon following seven straight weeks of losses for all three of the major stock averages. Last week, the S&P 500 briefly dipped into bear market territory, which is when an index closes at least 20% off from a recent all-time high. As of Friday's close, the S&P 500 was nearly 19% down from its January 5 record.

A few factors are contributing to the selloff, says Ryan Detrick, chief market strategist for LPL Financial. Among them: Historically high inflation is weighing on the economy, and the Federal Reserve is poised to continue to hike interest rates, which has some investors on edge.

If you're one of the many investors who have watched their portfolio take a hit during this volatility, "it is okay to be nervous, but do not panic and react," says Marguerita Cheng, a certified financial planner and the CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. 

When Cheng talks to worried clients, "I make sure clients know the reason why each asset is in their portfolio," she says. That's because having a diversified portfolio is a "tried and true" strategy, especially when the markets are volatile, she says.

What's in a diversified portfolio

A diversified financial portfolio includes a mix of assets including cash, equities such as mutual funds and ETFs, and bonds, says Cheng. "How much you allocate to each investment class is a function of your time horizon, your risk tolerance, your tax bracket, and your cash flow constraints."

Regardless of your allocations, each asset class is an important part of a long-term investment strategy, Cheng says.

Cash

"Cash is important because it's liquid and accessible," says Cheng. "Having cash protects you from market risk or liquidity risk."

The amount of money you hold in easy-to-access cash, like in a savings or checking account, depends on a variety of factors including your risk tolerance and time horizon to meet your goals. Experts generally recommend having enough cash accessible to cover 3 to 6 months worth of expenses.

Equities

Even though stocks can experience wild swings like the volatility we're seeing now, "equities are important because even though they fluctuate in the short term, they [can] appreciate at a rate greater than inflation over the long term," Cheng explains.

Over time, investing in equities is generally a good way to outrun inflation. For example, the average annual return of the S&P 500 Index is about 10%, while the annual rate of inflation reached 8.3% in April. Plus, if you don't invest, you're missing out on the power of compounding returns.

Keeping the equities portion of your portfolio diversified is important, too. Stock mutual funds and ETFs "help with diversification because you aren't betting on one individual company or sector," Cheng says. Instead, you are buying a basket of equities.

It is okay to be nervous, but do not panic and react.
Marguerita Cheng
Certified financial planner and CEO of Blue Ocean Global Wealth

Bonds

Traditionally, bonds are a safe place to hide during market bumps because they "help reduce the volatility," Cheng says.

Typically bonds offer more consistent returns, which can mean they lag stocks in good years and provide some stability in bad ones. For example, during the Global Financial Crisis in 2008, when the S&P 500 surrendered 36%, an index tracking the broad bond market returned 9%.

The importance of staying invested: 'Don't chase shiny objects'

When the markets are experiencing wild swings, "sometimes the most challenging aspect of investing is staying invested," says Cheng.

Selling stocks during a down day can have huge ramifications. For example, from the beginning of 2001 through the end of 2020, the S&P 500 returned an annualized 7.5%. Had you invested $10,000 at the beginning of the period and stayed invested for the duration, you'd have ended up with $42,000 at the beginning of 2021. However, if over that time period you missed the 10 best days for the stock market, you'd have less than half that — just over $19,000 — according to data from J.P. Morgan Asset Management.

If you're tempted to stock pick and purchase shares of a company that seem to be discounted, think again, says Detrick. Don't "chase the shiny object. Investors throughout history have chased return. Some of the previous high-flyers have pulled back 70, 80, 90%," he says.

This selloff is "a reminder to stay diversified, don't chase shiny objects, and remember that stocks that delivered recent outperformance don't always continue to do well going forward."

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