If you saw this headline in the Wall Street Journal: The Days of Set-And-Forget Investing Just Ended for Many Americans, you may be wondering: Should I change my investment strategy? We have a lot of respect for the Wall Street Journal, but this headline is frustrating. The article (fully unlocked version) shares how Americans who have been investing in US stock are now shifting to money market, bonds, gold, and international stocks. It also talks about how individual investors are trading in their 401(k)s at four times the normal level and that the share of investors who are bullish on the stock market is at its lowest level since 2022. These are all valid facts, but the conclusion that you should change your investment strategy as a result is misguided.
When market volatility occurs, many investors make changes to their portfolio. Often times, these changes are made at the worst possible times — selling when things are down and buying other things that are at high values. These changes can have significant long-term costs.
There is a better option.
As financial planners, we recommend that you select your investment strategy and asset allocation with a long-term view. For most clients, we advocate a combination of US and international stocks, short- and intermediate-term bonds, and cash. We select percentages for these assets that you can hold through good times and bad. Our planners match them with your financial goals and avoid exposure to more risk (loss) than you can afford. We rebalance back to these target percentages. Rebalancing causes us to systematically sell when assets are high and buy when they’re low. During periods of really high stock market performance, this approach means that you generally earn less than the broad market. It also means that during periods of really deep stock market downturns, you lose less than the broad market.
The Wall Street Journal headline implies that you should change your investment strategy. However, there are better takeaways from this situation for the long-term, evidence-based investor.
- A diversified investment strategy provides a buffer when a particular portion of the market experiences greater uncertainty.
- Changing your investment strategy in response to market volatility is only necessary if you weren’t properly diversified to begin with.
- If the investment strategy was diversified, low-cost, and matched to the individual’s financial plan and comfort level, change is more likely to cause harm than help.
- If you had abandoned all other asset classes in favor of large cap US stocks over the last decade, then this month’s market performance is a good reminder that concentration in a particular part of the market carries unnecessary risk.
- Focus on what you can control: asset allocation, diversification, and keeping costs low.
We invite you to tune out the noise that you must “do something” with your investments as long as you’re observing the principles described here. If you would like to chat more about how current market conditions may affect your financial plan, we are here and happy to help. Please feel free to reach out.