The Stock Market Rollercoaster: Fear in Your Portfolio? Here's How to Navigate the Dips
- By Nadine Oberhuber
- 4 Min
Feeling uneasy about your portfolio's performance? Here are some strategies to consider. - Perform the stated action immediately.
Let's face it, we all might have enjoyed a taste of the sweet success. And it was indeed those who jumped on the stock market bandwagon in recent years via ETFs, especially, who experienced this. The most popular stock market index that graced our savings plans and portfolios was the MSCI World Index. And it delivered returns of 15, 17, or even over 20 percent - per year! But since US President Donald Trump declared an economic war on the rest of the world, prices have plummeted. Many investors now have a knot in their stomach and a sense of dread looking at their portfolios.
Of course, stock prices go up and down, and we have heard this countless times. But not like this! For weeks now, we've been witnessing a sea of red on exchange platforms and our very own portfolios. Because prices have been falling since February 18th. Yet, the current crash seems to be accelerating. The MSCI World Index has fallen precipitously, alarmingly so. By now, the lost value is significant, and there's no end in sight. Is this the inevitable crash? Was it a mistake to bet on the stock market?
No Sign of a Stock Market Crash Yet
To clear the air, we talk about a crash when prices drop by over 20 percent across the board. And at least, the MSCI World Index has only lost 15 percent since its peak in February. That's undeniably painful, no doubt. But it's back at the level it was last May and will be in February 2024. You read that right, the world index has erased the value increase it gained last year. It hovers around 3300 points. In September 2022, it was less than 2400 points.
Now, let's delve deeper and evaluate whether it was a wise move to invest in such an equity ETF. For anyone who has held a world ETF for five years, since the COVID-19 crisis started - yes, it's true, many Germans became stock market savers during the pandemic - they can at least take comfort in a value increase of almost 75 percent. The significant market crash at the start of the pandemic pushed prices down harshly and unexpectedly. Over an eleven-year period, the MSCI World index has roughly doubled. Try achieving that with another investment form.
But anyone who's still worried, fearing the unpredictability of the American president, should first take a deep breath and let the numbers sink in overnight. And keep their hands off the portfolio. If the uneasy feeling lingers, consider whether stocks are indeed suitable for them - or if perhaps, they underestimated their risk tolerance. But panic, even in such a scenario, is unnecessary because selling stocks hastily is not the answer. Instead, the opposite holds true.
What Anxious Investors Can Do
Take a closer look: From now on, add index funds to your portfolio that are particularly stable and have minimal fluctuations. Consider bond ETFs, like those on the Global Aggregate Bond Index or its European counterpart, the Euro Aggregate Bond Index. They invest in bonds from countries with solid credit ratings and corporate bonds from global organizations with strong financials. Surprisingly, their prices generally rise when stock prices fall. They are climbing as we speak, even during difficult times, providing reassuring green numbers on your portfolio statement. Bonds stabilize the portfolio, as financial experts say. In addition, they pay fixed, predictable interest annually.
A well-diversified portfolio consists of multiple components, not just an MSCI World ETF. Let's say it plainly: While the MSCI World ETF remains a solid foundation, it is also subject to significant fluctuations and can have sluggish phases. Therefore, it should not be the only long-term investment in the portfolio, especially as wealth grows and the invested amount increases. A portion of the money should be invested in stable, fixed-income instruments such as bonds or bond ETFs, or kept in savings accounts with interest rates above 2 percent.
A Look at Younger and Older Investors' Approaches
A word of caution: As one grows older, it's not advisable to invest solely in stocks. A substantial portion of the money should be invested in stable instruments such as bonds or bond ETFs, or kept in savings accounts that offer interest rates above 2 percent. To illustrate, those with a strong disposition may allocate 20 percent of their liquid assets to safe investments. Those seeking balance may allocate around 40 percent. Those who are extremely cautious may further reduce their equity allocation to 20 percent.
Lastly, remember that market crashes are periodic, and no one can predict their duration. Sometimes they last only a few weeks, other times they continue for months. According to financial expert Benjamin Bente of Vates Invest, the current market fluctuations are in response to concerns that free trade might temporarily halt, and this repricing should occur in a matter of days, not weeks or months. Most of the downward movement should occur in the coming days, and this bear market began on April 3rd.
However, every crash has ended in the past, and stock prices have always rebounded well above their pre-crash levels. This pattern has been observed for over a hundred years, even during severe crises or wars. The economy has always found a way to reinvent itself and continue growing, and stockholders have benefited from this prosperity. That's why stocks are a valuable addition to a portfolio, provided we can hold onto them long enough to ride out the next market cycle.
- Portfolio
- Stock market index
- Stock price
- MSCI World Index
- Donald Trump
Investor Strategies for Stabilizing and Diversifying Portfolios:
- Diversification: Invest across different asset classes, sectors, and geographic regions to spread risk.
- Investment-Grade Bond ETFs: Include in portfolios for stability and income.
- Diversify within Fixed Income: Mix government and corporate bond ETFs, as well as inflation-indexed bonds.
- Dollar-Cost Averaging: Invest a fixed amount regularly, regardless of market conditions.
- Focus on Quality Assets: Invest in strong, financially sound companies.
- Tax Efficiency: Implement strategies to minimize tax liabilities.
- Regular Portfolio Reviews: Adjust asset allocation according to changes in risk tolerance or life events.
- Stay Informed and Seek Guidance: Keep up with market news and consult a financial advisor as needed.
- Minimum Volatility Strategies: Utilize methods to potentially limit drawdowns during volatile periods.
- Market Neutral Strategies: Use dollar-neutral portfolios or similar strategies to reduce exposure to overall market direction.
- Although I'm not going to be a big fan of the idea of a "couple" in terms of investments, the MSCI World Index, a popular stock market index, has delivered significant returns in the past, even during the COVID-19 crisis.
- However, the current market uncertainties and fear of crashes due to political factors like those associated with the American president, have led to a significant drop in the MSCI World Index, triggering a sense of dread among investors.
- To stabilize and diversify portfolios, investors can consider investing in index funds like bond ETFs, such as the Global Aggregate Bond Index or its European counterpart, the Euro Aggregate Bond Index, which tend to have minimal fluctuations and provide reassuring green numbers during difficult times.
