The S&P 500 is an index that covers 80% of the stock market. The prospect of rising interest rates in response to higher inflation is a looming uncertainty for investors.
Market downturns can be hard on the nerves. anxiety about what may happen can push you into bad decisions. The decisions to sell everything or trades to avoid losses cause more harm than good.
Having a plan for navigating market volatility can help you stay calm and confident. Try to get past this cycle with smart strategies.
Borrowing costs are affected by inflation. Smaller companies are more reliant on borrowing. They may not be able to raise prices without losing customers. Growth oriented businesses can be unpredictable in tough times.
Apple, Coca-Cola, and Costco are brands at the other end of the spectrum. All three have loyal customers who are willing to pay a premium or accept higher prices. The qualities position a business to manage inflation.
This does not mean that you should dump all small caps or growth positions. A small company that makes products and has access to capital can still be invested in.
You can trim back riskier positions in your portfolio by reviewing it. You can sit tight and wait for the cycle to turn around if you are confident in the quality of your stocks.
Don't have your wealth tied up in just a few companies. Staying diversified across 25 or more individual stocks in different sectors can greatly reduce your portfolio's potential for volatility
Just a few mutual funds or Exchange Traded Funds can be used to Diversify. 500 of the country's largest and most successful public companies are exposed to an S&P 500 ETF. If you combine that with a fixed income fund for stability, that's all you need.
You may need to give yourself a break when the financial headlines are bad. You could send your investing newsletters to a separate folder in your email. You can review them periodically, instead of being bombarded with disaster news all day.
The same approach can be taken with your portfolio. You can schedule a time to review it. Outside of the scheduled review, allow yourself to ignore the news.
The strategy encourages you to be more focused on long-term results. It is appropriate when you are comfortable with the quality and diversity of your holdings.
When the markets are volatile, it's most damaging to sell off stocks. Keeping a healthy balance of cash will protect you against that outcome.
When inflation is on the rise, it can be hard to hold cash. Negative real returns on cash can make you switch to something else.
Cash is the best solution for a financial emergency. With cash on hand, you can pay your rent, buy food, and keep the utilities on. You can't do all those things with stocks or gold.
If you think of cash as an insurance policy, the value lost to inflation is your premium. It is a price you pay for peace of mind.
When the market is rocky, panic is the worst thing to do. If you start considering drastic trades, that is a sign that you are panicked.
There has never been a stock market downturn that was followed by growth. You have a diversified portfolio. It will recover. The recovery will happen, but it is not certain. You can only get the rewards if you are still invested.
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