Maintain a Diversified Portfolio Even In Turbulent Times
While it is always important to maintain a diversified portfolio, it is especially vital to remain diversified during volatile market conditions. As an investor, you should be careful not to get caught up in any panic selling and should maintain your focus on long-term goals. This point is especially key if you have already built a well-diversified portfolio. If you are concerned about any particular securities, it may be better to discuss these with your Financial Advisor before cashing out.
Although no one can be certain about how the market will react long term, history shows that cataclysmic events that prompted short-term market losses later led to a more stable investing climate across all industry sectors. But still keep in mind that past results are not indicative of what will happen in the future.
The more your portfolio is diversified, the less chance you have of one security or investment having a detrimental effect on your entire investment strategy. Bonds, stocks and cash are the three major asset classes. Analyzing your investment objectives and tolerance for risk with your Financial Advisor will help determine the right mix of these asset classes for your situation. Within these asset classes, you can diversify further by owning stocks in different industries and countries; purchasing different types of bonds and different types of short-term cash instruments.
Defensive stocks typically outperform in a slowing economy or recession. These are typically stocks of companies that provide necessities like food, utilities, pharmaceuticals, toiletries or other consumer products with a short shelf life. The theory is that consumers will continue to buy necessities like food and address their medical needs regardless of economic conditions. As a result, companies that sell these types of products should not be as negatively affected by a slowing economy as companies that produce more discretionary types of products.
It also is important to remember that even in good times the value of stocks and bonds go up as well as down. When the market is experiencing more volatile movements, gains and losses can seem enormous. It is important to keep your long-term strategy in mind when experiencing these changes and realize that they can balance themselves out over time.
Unfortunately many investors associate a weak or volatile period in the economy as being the same as a weak time in the stock market, a perception that is not always correct. Not all market declines lead to a recession.
The truth is that the United States economy is cyclical, meaning that it moves through stages of growth and decline, varying in duration. A mistake made by many investors is that they buy and sell securities based on fluctuations in the economic data currently being reported rather than anticipating what the economy will look like in six to 12 months (based on a variety of factors including leading economic indicators) and making their investment decisions based on that outlook.
Most successful investors take a long-term view — at least three to five years — rather than expecting stellar returns overnight or panicking when the value of their securities declines. While diversification does not ensure a profit or protect against loss, a long-term diversified investment strategy based on your investment goals and risk tolerance can create a winning approach for you regardless of whether the economy is booming or experiencing a brief downturn.
You should talk with your Financial Advisor about what the best combination of investments is to accomplish your long-term goals.
This article was written by Wells Fargo Advisors and provided courtesy of George Cabalu, Managing Director - Investments in McLean, VA at 703-761-4794.
Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.