De-risking your portfolio is certainly not a new concept. However, the past year and a half have brought it to the forefront of the minds of many investors. Managing your portfolio is an important aspect of investing. Still, de-risking your portfolio is probably less hands-on than you may think.
Bull Market vs. Bear Market
If you don’t know much about bull markets and bear markets, it may be helpful to start by understanding these two concepts.
A bull market is an extended period of time during which the stock market is growing. While there isn’t one solid definition, usually a bull market indicates growth of 20% or more. Bull markets are difficult to predict, and are usually recognized by analysts only after they happen.
Between 2003 and 2007, we experienced a bull market. After the recession of 2008, the economy had over a decade of a bull market recovery until pandemic uncertainties in 2020. During a bull market, investors generally feel confident and excited to invest.
A bear market is the opposite of a bull market. During a bear market, stock prices fall by 20% or more. Investors usually worry about losing money during this time.
It’s important to remember that bear markets happen and are a normal part of the economic cycle. Corrections may take days, weeks or months. The economic cycle consists of four basic phases: expansion, peak, contraction, and trough. Bull and bear markets coincide with these cycles. While they can feel uncertain, they are a natural, healthy part of economics.
Allocate your portfolio for your goal, not for the current market
Because bull and bear markets naturally happen due to the flow of the economic cycle, it’s generally not wise to allow them to have a major influence on your investment decisions. Current events can easily cause fear, which often leads to changing allocations when the market is down. For example, many people are tempted to reduce equities based on the given market conditions. Resist the temptation to do this!
When you chase performance, your portfolio returns over time will most likely go down. Instead, stay patient. Remember that a bull market is coming! It may just take some time. If you avoid making major changes to your portfolio every time the market takes a downturn, your reward will be greater in the long run.
De-risking your portfolio requires keeping diversity
When looking at your overall portfolio, you should see diversity. Aim to have an appropriate mix of investments for your particular goal. Is your goal saving for retirement? Growing your overall wealth? Financial safety? Diversify your portfolio for your particular goal, and then have patience. It’s a good idea to rebalance your portfolio once or twice a year. Then, sit back and have more patience!
Invest for the long haul
Remember that investing always involves risk. However, being patient and waiting out the market is almost always less risky than adjusting for every market fluctuation. Building wealth is a marathon, not a sprint, so sit back and enjoy the view.
At Milestone Wealth Management, we want to help you invest for the long run, so that you can feel secure in your financial future. You only have one shot at retirement. We’ll help you get it right. If you have questions about your investments, we’d love sit down with you and help you create a portfolio plan that fits your goals. Call us today.
This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situations above are made.