- Markets are down, but they’re not in correction territory yet
- Consider diversifying your portfolio with a mixture of stocks, bonds, and commodities
- Think about adding more bonds to your portfolio
If you’re like a lot of investors, sitting on the sidelines and watching the recent market drop was probably a little scary.
On Monday, the Dow Jones Industrial Average had its biggest single-day point decrease in the history of the index. It plunged nearly 1,200 points, wiping out hundreds of trillions of dollars of gains across the board.
But perspective is always important.
In context of other big stock sell-offs, yesterday’s drop wasn’t as significant as, say, the beginning of the financial crisis in 2008, when markets shed about half of their value, losing some $30 trillion of wealth.
Fact: The market goes up and down
As stock returns have headed steadily upwards for the past few years, it’s easy to forget something important: The market is normally volatile, which means it’s subject to swings, and there will be good years as well as bad years.
In fact in the course of most years, it’s normal for markets to experience something called a correction, defined as a market drop of 10% or more, according to some experts.
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Is this a correction?
As indexes continue to seesaw, however, it’s important to remember that when you’re invested for the long haul, your going to see markets go up and down. Over time, it’s reasonable to assume your portfolio could increase at about 5% annually*, according to some experts.
“What Americans are witnessing now is…a return to normal market behavior, which has never followed a straight line,” Ruchir Sharma,the chief global strategist at Morgan Stanley Investment Management, wrote in the New York Times on Tuesday.
So if you’re invested in the market currently, consider staying the course.
Here are some tactics to think about
It’s never smart to put all your eggs in one basket. It’s a good idea to consider investing in a mixture of bonds, stocks, sectors, industries, and geographies. Maybe you have too much in technology-focused funds, or blue chips, or small cap companies. The world’s a big place, and there are ten economic sectors to consider. You can invest in clean tech, cybersecuirty, and healthcare, to name a few other options. You can also invest internationally, in emerging markets, Asia, and Europe.
Consider putting money in bonds.
As the stock market has scaled ever higher heights in the past year, it’s likely your portfolio may be over-allocated toward stocks, because that’s where the big returns have been. Bonds, which are essentially IOUs from the federal and local governments, as well as companies, are generally considered safer investments. Since the financial crisis, bond returns have been pretty muted, at about 2%. But with short-term interest rates going up, the interest rate on longer-term bonds appears to be increasing too. The yield on 10-year Treasuries, for example, has risen about 0.5% over the past year to about 2.85%.
It’s normal for markets to experience something called a correction, defined as a market drop of 10% or more.
Think about commodities.
These are hard assets including metals (think gold, silver and nickel), grains, livestock, and foods. Commodities can act as hedge against inflation, according to some experts, since they tend to increase in value as inflation rises.
Don’t panic, you’re an investor
It’s important to keep in mind that there is no way to eliminate uncertainty from investing completely. But with some planning, it’s possible to minimize the risks you face in the market.
*Example is a hypothetical illustration of mathematical principles, and is not a prediction or projection of performance of an investment or investment strategy