Stocks have had an ugly stretch since the beginning of this year.
The S&P 500 posted its worst day of 2022 earlier this week, while the Dow Jones Industrial Average and the Nasdaq Composite entered correction territory and a bear market, respectively. To add to that, worries around supply chain disruptions as Russia’s attack on Ukraine intensifies have spurred fears of a global recession and sent commodity prices surging.
Recent events have had even Wall Street strategists torn about what to do, so what does the turbulence mean for retail investors as they watch their portfolios bleed out?
Dan Egan, director of behavioral finance and investing at the financial advisory firm Betterment, spoke to Yahoo Finance and offers four tips for retail investors during this time of uncertainty.
Don’t panic sell
Even during an extended stretch of losses, equity investors should resist the gut reaction to sell when the market experiences a downward swing. Panic selling is the emotional, knee-jerk reaction often triggered by dramatic drops in stock values as market participants instinctually seek safety in the face of perceived danger. But during times of turbulence, the anxiety associated with events that may cause sharp declines in security prices are the cause of downside, rather than the circumstances themselves, according to Egan.
“When there is an anxiety-provoking event that you can look at and read about, but you can't do anything about or resolve, you end up in a worse place the more that you try and pay attention to it,” Egan said, adding that investors can benefit from employing control mechanisms around how much time they spend digesting potentially negative information, like time-limits on social media scrolling.
“Setting up these types of self-control tactics to know what is going on without causing chronic anxiety is one of the smartest things you can do,” he added. “Log on only on some sort of schedule that allows you to be intentional about it — this is not entertainment, it is something to take seriously, and do it like you would a professional monitoring your portfolio.”
Don’t try to time the market
One of the most widely-asked questions is, should you buy the dip? The answer is yes and no. Investors should stay the course on their long-term investment strategies and continue allocating even in periods of downturn but avoid trying to time the market in expectation of higher returns in the short-term.
“If you have been waiting for a reason to invest — if you've been saying, ‘I don't like it when the market is high, when it feels bubbly, or when it feels expensive’ — then that excuse is gone now, and you should definitely use this as the catalyst to pull the trigger,” Egan said. “I don't recommend market timing for the sake of thinking that you're gonna get better returns, but I do think that it makes people comfortable knowing that they are not investing at a high and are getting some sort of discount.”
“Always invest as early as possible so that you have as much time in the market as you can,” said Egan, adding that allocations should be made based on longer time horizons. “If you're investing now and can get 20 years out of it instead of 15 years, that's better. The longer you can invest for, the more time you have to earn on your investments.”
Market corrections are a good time for investors to take little steps to improve their portfolios. Among those measures is rebalancing — changing the weightings of assets in accordance with their price changes and levels of volatility in order to manage risk. For example, if an individual’s strategy comprises a mix of 60% stocks and 40% bonds, fluctuations in values can change those fractions, and investors should look to buy or sell whatever percentage necessary of each asset class in order to restore the original distributions.
Another step self-directed investors can take is seeking out tax-loss harvesting opportunities. Tax-loss harvesting is the timed selling of securities at a loss in order to offset the cost of capital gains taxes associated with the sale of other assets at a profit. Performing this action can allow an individual to move out of an investment they were locked into over concerns about the short-term tax potentially owed on the sale. During times of market downturn, the taxes are going to be “far less of a pain to experience,” Egan said.
Egan called these steps “good hygiene” and “good housekeeping.”
Russia’s attack on Ukraine has placed a renewed focus on incorporating environmental, social and governance factors into investment decision-making. In recent weeks, investors have witnessed and participated in divestment campaigns as they have severed ties with Russian business dealings and raised questions about clean energy as commodity prices surge and Western nations move to slap penalizing bans on Russian oil and gas.
“It’s a principle, moral and strategic thing to think about whether or not you want to be investing in some sort of environmentally- or socially-conscious way,” Egan said. “It is a time to have conversations about what a good, sustainable long-term investment looks like in the modern era. This is a catalyst to push some harder thinking on it.”
Often when discussing ESG, the conversation centers around removing exposure to things that are deemed “bad,” like authoritarian regimes, or petroleum, due to its environmental impact, Egan said. But on the opposite side, it is equally important to make active investments in clean energy initiatives that can create a “better tomorrow.”
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc