Investors knew this year would be different. But lately, they’ve been getting a lesson in just how different it is shaping up to be.
Most analysts expected some action on interest rates from the U.S. Federal Reserve in 2022 — but maybe not the five rate hikes they’re now pricing in. Inflation was clearly driving upwards, but we’re seeing much higher, more consistent price increases. People have been moving their money away from growth-led tech companies and toward those in the value category, or stocks considered underpriced. And banks are now forecasting slower growth in the months ahead. All this is creating a wave of volatility not seen since the start of the pandemic era.
The Nasdaq Composite had its worst month in nearly two years in January, falling 9%. Massive intraday reversals made it difficult for retail traders — who have grown accustomed over the past two years to buying dips only to see them rise again — to time the market. Up until late January, confidence had been running high among the retail crowd, who’ve fueled speculative excesses across markets from cryptocurrencies to meme stocks. But both have been trending downward for months. And now, shifts in the situation in Ukraine are keeping volatility gauges well above 12-month averages.
“It’s a new investment regime, and the things that have done well the last couple of years probably aren’t going to do well in the next couple,” said Ben Laidler, global market strategist at the platform eToro. “Interest rates are going up, growth is slowing, returns are going to be lower, there’s going to be more volatility. That is the new reality.”
What does this mean for your portfolio? Investors who know how to take advantage of the changes in the market stand to profit from new opportunities. Those who don’t — or those who think they do but are mistaken — stand to lose out. To help guide you through these changing markets, Bloomberg News polled financial advisers and other experts for their best suggestions for retail investors. Here’s what they told us:
Gut check your risk tolerance
Putting 70% of your portfolio in tech stocks may have felt great when they were going up. But what about on a day like Feb. 3, when Meta Platforms Inc., Facebook’s parent company, faced the biggest wipeout in stock market history, erasing $251 billion in value. The company had been a star of the pandemic era, climbing 127% from March 2020 until early January of this year.
Conditions are rife for such dramatic changes. Yet an investor who finds out in the middle of a downturn that they’ve overestimated their tolerance for risk may wind up being their own worst enemy. The classic mistake is selling into a downdraft and locking in losses, and then sitting out the market’s eventual rebound.
There are simple ways to keep your nerves in check. Behavioral-finance studies have shown that the perception that investing is risky is heightened among people who check portfolios frequently, said Randy Bruns, senior financial planner at Naperville, Ill.-based Model Wealth.
Basically that’s because the odds of someone seeing a loss in their account are greater if they check it more often. If an investor looked at his or her portfolio daily, the chance of seeing a moderate loss of 2% or more was 25%, research has shown. But checking quarterly, the chance of coming across a loss like that fell to 12%.
One way to limit how painful a loss may feel is to look at portfolio returns in percentages, not dollars. “While a $30,000 loss may sound catastrophic, a 3% ‘paper’ loss off your million-dollar portfolio when the Nasdaq's down 15% may be appropriate and in line with your goals,” Bruns said.