What a few days it’s been for the markets. Last month’s “Teenage Bitcoin Millionaire” stories have given way to headlines like “Dow Plunges 1,175 Points,” driven by uncertainty around inflation and the rise in global interest rates. Things can change very quickly in the stock market, and none of us has a crystal ball to tell us when (not even the ultra-confident talking heads on tv…believe me).
So what’s an investor to do? Spoiler alert: The answer, in most cases, is “nothing.” And here’s why.
At Ellevest, you’re not just investing in the Dow Jones Industrial Average (DJIA) or any single asset class. Our experience tells us that the best way to protect against the unknown is a well-diversified investment portfolio, with a range of investments; in fact, you won’t find any portfolios on Ellevest.com with a 100% allocation to stocks. An example of why this type of diversification matters in a portfolio is that, while U.S. stocks were down yesterday, U.S. bonds were slightly up.
That's why the investment portfolios we offer at Ellevest are diversified across stocks, bonds, and alternatives, depending on your goal. For near-term goals, there is a lower allocation to stocks to reduce the risk of an equity market downturn derailing you near your goal date. For longer-term goals, there’s a higher allocation to stocks, because that can give you the time to make up market downdrafts like this one, to give you the opportunity to earn the higher returns that they have historically posted. Through all of this, market declines are common and a (necessary but unfortunate) part of investing.
Let’s take a step back and put this market dip in context. While the headlines screamed that the market drop was the largest ever, in percentage terms (which matters more), it was not even in the top 20. In 1987, the DJIA dropped 22.6% in a day, versus yesterday’s 4.6%.
What felt so jarring was that it was a reversal of recent market movements: If you started investing in the U.S. stock market in the beginning of 2016, and didn’t touch your investment through January of this year, your experience would tell you that markets go up, and up, and up. In fact, the DJIA nearly doubled over that time period. In comparison, on average, the DJIA has returned about 7.7% per year. In 2017 alone, it was up more than 25%. What we all need to remember is that this type of market performance is NOT representative of average market returns.
The bottom line is this: Markets fluctuate over time, and one of the biggest mistakes investors make is trying to “time” the market by guessing when to buy or sell. Another big mistake they make is to “do something” (i.e., sell) when markets decline. Instead, it is our view that one of the smartest things you can do is invest regularly — a bit out of each paycheck — into a low-cost, diversified investment portfolio. This can mean you are buying in some markets that are higher and some that are lower, but those can even out over time. We believe the most prudent course of action is to have a well-thought-out asset allocation, and keep investing steadily over time.
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The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.