Rising markets, we can all agree, are generally positive for investors. And we also know that maintaining a balanced portfolio is generally the best way to maximize your opportunity for long-term success — whether the market is up, down, or wobbly. Just as many investors find it difficult to stay invested when markets pull back, many also find it challenging to stay focused when markets are roaring. After all, it’s human nature to chase returns and to be afraid of missing out.
If history teaches us anything, it’s that staying invested with a well-thought-out portfolio and financial plan is the key to long-term success. Doing so helps investors capture the upside as markets rise over long periods while protecting from downside when they inevitably decline over shorter ones.
Just as a sensible sedan, SUV or minivan may not be able to keep up with a race car on an open highway, they will handle the inevitable potholes and traffic jams much better. And, in the end, they will reach their destinations in a safer, more comfortable manner.
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Three reasons being balanced is best
- A recent survey of investor sentiment (see chart below) suggests that bullishness is now near historic levels among everyday investors —a stunning reversal from a year ago. That this is occurring in lockstep with rising markets should be no surprise, especially with the S&P 500 and Dow each having returned over 10% to date this year with dividends.
Chart: Some measures of investor sentiment are at multi-year highs
Sources: Clearnomics, AAII
- However, history shows that investor sentiment is often a contrarian signal — a sign that investors are focusing too much on return and too little on risk. This was certainly true during the dot-com era and the housing boom, but has also taken place periodically over the past decade. While this is by no means a timing indicator — markets can rise much longer than many expect — it is a reminder for long-term investors to avoid being distracted from their plans.
While many fundamental factors have continued to push markets higher, investors should not expect markets to accelerate forever. At this point, the expectation for GDP and corporate profits to recover later in 2021 is widely understood. This further emphasizes the need for discipline and risk management.
- Although the broad market continues to climb higher, the sectors and areas driving this have changed over the past several months. Areas such as small caps, value stocks, energy, commodities, financials, and more have surged during the recovery after falling behind technology and growth stocks last year. Thus, it’s important to not only focus on the headline index numbers but to understand what is driving performance beneath the surface.
Don’t swerve in and out of the markets
Thus, investors ought to stay focused, consistent, and disciplined in the months to come. Stock market pullbacks are impossible to predict but are inevitable nonetheless. The goal of long-term investors is not to swerve in and out of markets based on past returns, but to contribute consistently over time and let compounding help you keep building — through both good times and bad.
Stay the course with a portfolio that’s built to last
Want a portfolio that’s designed by investment experts to seek maximum advantage of opportunities for gain, while managing risk appropriately, and adjusting automatically to stay on course over the long-term, MoneyLion can help.
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