Although the markets have teased investors with short-lived rallies this past year, we can’t lose sight of the central bank’s determination to bring still-stubborn inflation gauges under control. In this fourth quarter, we will again face the prospect of one more rate hike in December. Thus far, investors have endured six hikes this year alone, with the last 75 basis point increase bringing federal funds rates to the current range of 3.75%-4%. With odds favoring another 50-to-75 basis point increase next month (one-half to three-quarter of a percent), investors are nervously waiting for some calming message from the Federal Reserve. In the meantime, vigilance is key as investors continue watching headlines and managing through market volatility.
Current volatility contributing to risky market conditions
Most worrisome to investors in today’s environment, however, is the deceptive nature of bear markets. Rallies are generally fleeting, countered by weakening economic news, rising inflation risks and geopolitical headlines. And for months now investors have held the losing hand as broader markets vacillated between corrections (10% market downturn) and bear markets (losses greater than -20%). The Treasury markets haven’t fared any better with returns across the maturity spectrum also firmly in negative territory. Although there has been some success wringing consumer inflation down from June’s 9.1% peak, the Federal Reserve has yet to signal a tapering of rate hikes. Until there’s a sense of economic normalcy, markets will stay volatile as investors continue looking for “safe” investment ideas.
Losing sight of long-term goals leads to short-term mistakes
Unfortunately, recessions can be brutal for investors as market corrections often begin months prior to the first troubling economic signal. Corrections are indeed challenging for a number of reasons as we often lose sight of our longer-term goals. During these volatile periods associated with recessions, investors often try to time both market downturns and recoveries. As many ultimately discover, market-timing is seldom a successful strategy. Many investors wind up with greater losses from day-trading stocks all the way down to their lows versus buying that great stock at its lowest point.
Diversify to meet long-term investment goals
While it is too early to see if our current market situation is leading down the path to a recession, the key to successful investing is creating a plan that looks beyond these market cycles, diversifying towards longer-term investment goals (college fund, a new home or, retirement). A successful strategy begins with first ensuring there is enough liquidity (savings account) to take care of emergency cash-needs. Next is developing a “living” investment plan that reflects our evolving life and life goals. Ultimately, long-term investing should be broadly diversified to meet those objectives. Usually, this entails investing across the spectrum of asset classes (stocks versus bonds versus alternative investments), markets (domestic versus global) and investment styles (value versus growth or small versus larger company stocks).
Ride the wave through volatile periods
Ultimately, investors should remain patient and look beyond market cycles. Resist the urge to day trade, attempting to make up for any lost ground due during those volatile periods. A successful investment strategy is one that rides, not trades, through market cycles.