Market fluctuations can feel like watching a chaotic scene unfold, making it hard to look away. However, it’s essential to stay focused and consider your next steps.

Currently, the stock market is experiencing significant volatility, leaving many investors anxious for stability. Unfortunately, there’s no clear timeline for when this uncertainty will end. Yet, historical trends provide some comfort: major declines have always been temporary. The shortest bear market occurred in 2020, lasting only 33 days before a recovery took about five months. This recent experience may influence our expectations.

Before the recent downturn, we enjoyed an unprecedented 11-year bull market, which set high expectations for future performance.

Recently, the market is acting predictably amidst the chaos. For instance, last year saw an impressive S&P gain of 26.9%, a rarity in typical market behavior.

Allan Roth, founder of an investment advisory service, advises those struggling with market fluctuations to evaluate their asset allocation and avoid constant monitoring of daily changes. He admits he finds it challenging himself.

Daily market swings stem partly from algorithmic trading, which can exaggerate shifts in prices. History indicates that these dramatic fluctuations often correlate with economic downturns.

REBALANCE YOUR PORTFOLIO

If your investments are out of alignment, consider rebalancing, as Roth suggests. Keeping your allocations within 6 percentage points of your target is a good practice. For example, if you aim for a 60/40 split between stocks and bonds, and you fall below 54% in stocks due to market losses, it might be time to adjust.

However, those investing in target-date retirement funds generally shouldn’t need to rebalance, as these funds automatically make adjustments based on your timeline.

Stocks and bonds typically move inversely, but currently, both are undergoing corrections of at least 10%, which is an unusual scenario not experienced in the last five decades.

THINK LONG-TERM

Investing remains a long-term endeavor. The combination of high inflation and market uncertainty won’t persist indefinitely. Roth believes that despite the current challenges, capitalism will ultimately prevail.

The current market turmoil stems from various factors. When COVID-19 hit, the government implemented stimulus measures, including relief checks and support programs. This influx of cash combined with supply chain issues due to the pandemic and geopolitical tensions has contributed to inflation. The situation is unprecedented, making solutions hard to pinpoint.

Federal Reserve Chairman Jerome Powell has recognized the complexities of the current economic landscape, stating that the Fed's tools for managing it are limited. Historically, 11 of the last 14 tightening cycles since 1950 have led to recessions, according to Lisa Shallet from a major wealth management firm.

Like a young child, the market exhibits unpredictable behavior and emotions.

TAKE ACTION

What should you do now? Often, the answer is to take no immediate action.

It’s wise to ensure your portfolio is diversified. If necessary, follow Roth’s advice to rebalance. For those just starting to save for retirement, don’t let current events discourage you; history suggests your contributions will eventually yield significant growth. Conversely, if you’re nearing retirement, consider holding more cash to avoid drawing from a dwindling portfolio. After taking these steps, limit how often you check your balances.

Roth offers this advice: while it’s natural to feel anxious, try not to act on those impulses, as fear-based decisions often lead to poor outcomes.

Reflecting on his own experience during the March 2020 bear market, Roth admits that despite knowing he was buying at a low, he felt apprehensive. “It was a difficult choice,” he shares, illustrating the human element of investing.