If you’re into watching CNBC or another market news outlet, one common theme these days is that of a potential recession and poor investment results throughout 2023.
While the doomsayers may lead you to believe that the time to escape the market is here or near, it’s important to remember the reasons to ignore them.
Reason #1: You’re investing for the long-term
In most cases, you likely have investments that you hope will grow to large numbers over many years. Maybe these investments are for retirement or to pass along to family members. Whatever the reason, these funds do not need to be accessed anytime soon. This gives investments plenty of time to recover if they suffer a short-term pullback due to a recession or market correction.
But by pulling out the funds, you’re making a short-term decision. You’re stating that the market will pull back now. Maybe it will, maybe it won’t. No one actually knows that level of detail. Meanwhile, you could be triggering a taxable divestment, the market could continue forward – leaving you buying in at a higher price – or you pull out and the market recovers, leaving you missing the rebound.
Don’t make a short-term decision with your long-term funds. By selling, that’s really what you’re doing.
Reason #2: It goes against your financial plan
When developing a financial plan, one thing we consider is how the market will grow over many years. Looking at the short-term ups and downs of the market does not provide you with a clear sense of where you will stand 10 or 20 years from now. In fact, it’s counterproductive since we can get lost in the noise of short-term figures.
Instead, if you have a desire to pull out of the market when the potential for a downturn rears its head, then it may require returning to your plan to ensure you have the proper asset allocation based on your own risk tolerance. If a downturn in stocks leads to sleepless nights, then it’s likely time to reconsider if one should have that much exposure to stocks, as a general example.
If, instead, you simply want to divest to reduce your losses today, then it’s time to look back at your financial plan to see what it could mean for the long-term.
Reason #3: Your portfolio doesn’t consist of one asset
It’s easy, when watching the news, to see headline figures like “The S&P 500 down 10%” and think that means your portfolio has fallen 10%. That’s not true because your portfolio should have diversification. While this likely encompasses different index funds, it covers stocks, bonds and international exposure as well.
There’s no headline that highlights your own, individual portfolio. And looking broadly to determine what you should do with your diversified assets will not leave you in the best position.
Instead, it’s important when you see such figures to remember that’s why you diversify. It won’t keep your portfolio from ever losing money. But, in the long run, it will protect it from isolated, short-term events.