It has been a turbulent 2022 so far for investors. After only one 5% pullback all of last year, the stock market has reminded us that investing is risky in the short term. The S&P 500 Index is on track for its worst April in 40 years, and the Nasdaq entered a bear market on April 26 with its more than 20% decline.
I know every correction feels like it’s going to be the end of the world, but most of the time the world does not in fact come to an end. If there were no risks involved in buying stocks, there would be no rewards.
We are coming off a remarkable three years. The stock market returned 31% in 2019, 18% in 2020, and 28% in 2021. These great returns come with a price.
Right now, the current correction is actually average. Since 1980, the average yearly drawdown is 14%. Over that time the stock market has had an annual return of 9%. Below you can see the yearly drawdowns and returns.
What Should Investors Do?
No one can predict what will happen in the short term. The stock market is driven by a combination of earnings, trends, economic data, greed, fear, geopolitical events, human nature, and much more.
The biggest risk is always what no one sees coming. Every year there will be a new surprise with a reason to sell. The best strategy to prepare for these types of risk is to diversify.
Do you own a large amount of an individual stock? Diversify into a fund that spreads your risk across numerous stocks. Recently, we have seen plenty of individual stocks fall 50% or more.
Are you overexposed to one segment of the stock market? Look to spread your money across different sectors. The best performing sectors in 2022 look completely different from 2021.
Do you need money short term from your investments? Reduce your stock exposure and increase your liquid savings. Owning stocks is risky in the short term.
These are just a few examples of when an investor should make changes to their portfolio.
The investing environment will be more challenging in 2022, but history suggest patience will be rewarded. There may be more downside in the short term, but consumer and business fundamentals remain strong.
If you have any questions or would like to schedule a review, please reach out.
Sources and Disclaimers:
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. The Standard & Poor’s Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.