Investing in a Volatile Market

The stock market has had a long great run but recent events have investors nervous. Inflation, negative economic performance, the Russia-Ukraine war and continued supply-chain disruption, delays and shortages and other factors are all contributing to the daily ups and downs of the market. 

How Do You View the State of the Market?

There are a couple of schools of thought when it comes to investing in the market. There’s the old adage on Wall Street that the market climbs on a “wall of worry.” When everything seems like it’s all doom and gloom, stock prices start rising when investors begin to show the first glimmer of confidence. Instead of simply looking at Q1 2022 economic data, analyze the reasons behind the data. For instance, inventories fell in comparison to Q4 2021 because there was a huge buildup of inventories last year. Government spending was also down when pandemic-relief efforts were scaled back.  Add to this, the fact that consumer spending and business investments were both up in Q1 2022. This view has some continuing to invest, particularly when they can buy stocks at a lower price.

On the other hand, some analysts predict that the market will continue to suffer massive losses – or at the very least, will experience a significant correction. Some argue that public companies have produced an overpriced stock market, excessive corporate debt, and insufficient levels of investment. Furthermore, these analysts believe the reason that U.S. stock valuations have remained high for so long is due to the Federal Reserve’s support of Wall Street via low interest rates and successive bouts of quantitative easing. Inflation is changing this picture because as interest rates rise faster than corporate cash flows, businesses are being forced to de-leverage and cut investments. Following this mindset, the valuation of U.S. stocks could plummet.

Assessing Investments in a Volatile Market

  • Don’t sell solely based on current market movements. Shut out the noise, calm the fear and stay the course while evaluating your portfolio. 
  • Gauge your risk tolerance. How well positioned are you to handle large swings in the market? Do you have enough cash on hand to meet your immediate goals? If not, look at moving some of your investments. 
  • Diversify and rebalance your portfolio if needed.  Swings in the market can uncover the need for your portfolio to be better diversified and the mix of stocks rebalanced to better reflect your intended total asset allocation. Market fluctuations can also cause your allocation strategy to deviate from its original goal. Assets that have appreciated in value will account for a larger portion of your portfolio over time, while those that have declined will account for less. Rebalancing entails selling positions that have become overweighted in comparison to the rest of your portfolio and reinvesting the proceeds in positions that have become underweighted. 

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