The stock market had the worst month since March 2020: advice for investors
The stock market is off to a bad start this year.
The S&P 500 — a benchmark commonly used to measure the broader stock market — fell 5.3% in January, making it the index’s worst month since March 2020. The Nasdaq Composite also saw its highest sharp month-on-month decline since March 2020, down 9% in January, and the Dow Jones Industrial Average fell 3.3% for the month.
January was a volatile month for equities as investors grappled with the Federal Reserve’s anticipated interest rate hike. If the roller coaster has made your stomach turn, that’s understandable. But market declines are part of investing, and a well-diversified portfolio set up for the long term can withstand the volatility we’re seeing right now.
What future for the stock market?
January’s poor performance can be scary if your eyes were glued to your trading apps, but it was also somewhat expected, says Anjali Jariwala, certified financial planner and founder of FIT Advisors. Stocks have been steadily climbing to new all-time highs since their March 2020 low, and when prices are this high, a downturn isn’t all that surprising. Many investment experts have said that a market correction may be inevitable.
As for the Fed’s planned interest rate hike, remember that rate cycles are normal and the central bank’s hawkish stance should provide some comfort as the Fed focuses on containing inflation, Seth Wunder, chief investment officer of trading app Acorns told Money via email.
Historically, markets have done well during rate hike cycles, with the S&P 500 offering positive returns in 11 of the Fed’s 12 rate hike cycles since the 1950s, Wunder adds.
Remember: this isn’t the first time the market has gone down, and it won’t be the last. In August 2021, the S&P 500 was up 100% from its March 2020 low.
What should investors do now?
A long-term investor shouldn’t view dips as a reason to make big changes to their investments, says Jariwala. Instead, they should use this time to rebalance their portfolio and confirm that their asset allocation is still in line with their risk tolerance and time horizon for needing the money, she adds. (Rebalancing refers to when investors sell investments that have gone up in value and replenish investments that have gone down in value to bring their portfolio back to its target weightings.)
Highly speculative assets have benefited from the Fed’s willingness to keep interest rates low for so long, but as that changes, these risky assets — cryptocurrency, for example — could be the first assets to go. affected, Jack Ablin, chief investment officer and founding partner of Cresset Capital previously told Money. If you’re investing in speculative assets, it might be time to remove some of that risk, he added.
If you’re concerned about your retirement accounts, like your 401(k), remember that most of them invest in funds that reduce risk and insulate against some degree of market volatility, says Edward Gottfried, Chief Product Officer at Betterment’s 401(k). Business.
“Retirement is a long-term investment, which means daily volatility won’t have a significant impact on your future retirement security,” adds Gottfried. Changing your portfolio allocations has actually been shown to lead to poorer performance, and your 401(k) is more likely to recoup returns if you stay the course, he says.
Overall, it’s better to invest in a way that allows you to stick to your plan, rather than one that makes you feel the need to act every time the market drops.
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