Risk is inherent to all investments. After all, the market never remains stagnant, and those ripple effects can have a substantial impact on your long-term wealth. However, the greatest threat to your wealth actually has nothing to do with a potential market crash—an unavoidable part of having funds in the stock market for every investor.
Instead, long-term investment strategies highlight how you should react to that market crash.
If you want to learn more about how to future-proof your investments by prepping now for the inevitable market ebbs and flows, here is our best advice.
The Anatomy of a Market Scare
Market scares can begin with a single bombshell. The cycle that leads to market dips is often more predictable than we realize.
Scan news sources for signs of a single geopolitical event or economic data point. Sometimes it might seem innocuous, but it can trigger a lasting feedback loop.
With a single piece of news, many investors immediately think they should try to “get ahead” of the bad news by selling their positions. The sudden drop in the number of people holding a given asset triggers a price drop that influences trading bots. They sell to cut losses, which news outlets interpret as a sign to publish about diminishing stock prices.
Then, these effects start to trickle down to more casual investors who may feel like everyone else knows something they do not. In turn, they sell, too.
Keep in mind that the recency bias impacts how we view the news cycle. We tend to overweigh the last 24 hours of news more than we do the fifty years of market history at our fingertips. Many people would make different decisions if they put things into perspective with decades of data.
Before you know it, headlines have taken over the internet. After all, your favorite news media outlets are designed to sell clicks, not build portfolios.
Remember that Market Ebbs and Flows are Normal
Did you know that markets follow the same cyclical pattern every time something major shifts? If you can spot the exact phase the market is in, it will be easier to rest in the knowledge that it will eventually turn around—often to the benefit of your portfolio and profit.
Here are the four phases of the market cycle:
Boom: This phase sees tremendous growth, usually at a rate of 4 percent or more for at least six months. Toward the end, inflation occurs as prices rise, but investors still clamor for the chance to invest more in a booming economy.
Peak: The moment at the end of the boom phase is called the peak, when the economy stops expanding, stock prices become less consistent, and interest rates rise.
Bust: The bust follows the peak. Fortunately, it usually lasts less than a year (or a recession occurs, where we experience a long-term bust). Unemployment rises to 7 percent, and the stock market may crash.
Trough: After the bust, the trough is the market of a bottomed-out economy where investors with money can get great deals. The economy stabilizes, showing no growth or decline before entering a boom phase.
Even though these cycles are well known, investors cannot “predict” the ebbs and flows. Every investor takes a gamble when they try to time the market. Poorly timed selling during a headline-driven dip often leads investors to miss the sudden, violent recovery days that make or break a portfolio’s long-term returns.
Strategies to Avoid Fear-Based Investing
With all of that in mind, how do you avoid fear-based investing? Long-term investment strategies are essential to preserve wealth and continue its growth through every market swing.
These top four tips will guide you toward more grounded decisions that are less influenced by the unexpected and unpredictable news cycle.
Hire a Financial Advisor: Don’t try to go it alone. Work with a professional financial or investment advisor who can offer practical, data-based advice—someone who can talk you down if the market has you stressed. Look for a professional who serves as a buffer between a scary headline and that “Sell Now” button. Just ensure they are a fiduciary before agreeing to work with them. If they are charging commissions, they are not.
Implement the 24-Hour Rule: Stop allowing yourself to make snap decisions. Instead, implement a mandatory waiting period before making a non-scheduled trade. It gives you time to think about the long-term implications of the news and lets the dust settle. Impulsivity never factors in.
Information Hygiene: Most of us scan the headlines repeatedly throughout the day, but is this really the best way to move ahead? Transition from breaking news, which is noisy and volatile, to periodic journals, which are often more analytical with data-driven responses. News has become more sensationalized in recent decades and may not be providing a balanced report.
Stick to Investment Best Practices: Above all else, stick to investment best practices such as diversification and asset allocation. While there is no such thing as a guaranteed, foolproof investment, some investments are considered “safer” in the event of a downturn. A diversified portfolio may not feel the crash as much when it arrives. This can insulate you from the high emotions of a perceived loss.
Prepare for Data-Driven Decisions with Magellan
It would be impossible not to think about the headlines when making investment decisions. But Magellan takes a different approach that can lead to calmer, wiser decisions based on long-term market trends. The boom-and-bust cycle allows us to reallocate your portfolio as market shifts take place.
Our proven game plan helps us shift the composition of your portfolio from stocks to bonds during a bust cycle and back again during a boom. This type of routine rebalancing is central to maintaining wealth, regardless of where the economy is in its cycle.
Let our team take a look at your investment strategy and see how we can help you improve! Reach out and let’s chat.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group.