How to Balance Risk and Opportunity When Markets Get Tough
Global markets are worried about a possible trade war and recession. China has responded to trade actions with its own counter-measures, raising concerns. As investors seek safety, stock markets worldwide have fallen while bond prices have risen.
A balanced investment approach matters more than ever
Like in sports, successful investing needs both defense and offense. Defense means having investments that can handle different market conditions. Since market swings and unexpected events will happen, being prepared is key.
Offense means finding good opportunities when markets change. While market uncertainty can be stressful, it often creates better prices for buying investments. The best approach combines both strategies.
Two basic rules of investing are spreading your money across different investments (diversification) and staying invested for many years. The chart shows how different combinations of stocks and bonds have performed over time. In a single year, stock returns can vary greatly - from gaining 60% to losing 41%.
A balanced mix of stocks and bonds helps reduce risk. For example, while stocks are down 13% this year, a portfolio with 60% stocks and 40% bonds only fell 4.6%. History shows that over longer periods like 20 years, balanced portfolios have never lost money on average.
Market fear can create buying opportunities
The VIX index shows how worried investors are about the market. When it spikes, markets are usually falling sharply. However, these fearful times often create the best opportunities to invest.
This is especially true when market problems are temporary rather than permanent. Sometimes investors have to sell for reasons unrelated to the actual value of investments. Patient investors can benefit from these situations.
Investment prices look more reasonable now
Bonds have helped protect portfolios this year as their prices rose when stocks fell. They typically move differently than stocks, which helps reduce overall portfolio risk.
After recent market declines, stock prices look more reasonable compared to company earnings. Some market sectors have become especially cheaper.
The bottom line? Having both defensive and offensive investment strategies helps manage risk while finding opportunities during uncertain times. Over the long run, maintaining a balanced portfolio is still the best approach for reaching financial goals.
Want to learn how Keep It Simple Financial Planning can help? Please don’t hesitate to reach out here.