We are now one year past the sharp market fall caused by the initial COVID outbreak in the US, in March 2020.
The wonderful, and remarkable, financial news: the stock markets rebounded strongly, up around 80%.
The dangerous, and sadly predictable, financial news: too many investors currently believe there are no sharp curves ahead.
Investors are human. That means we have short memories, and we believe the recent past is a good indicator of what will happen in the future. Last March, too many people were convinced stocks would keep going down. This March, the consensus seems to be everything will keep going up. Not just stocks, but bitcoin, NFTs, SPACs, house prices ... you name it.
Don't make that mistake.
Assume the future will be different. It always, always, always is.
What do you do, specifically, with that realization?
- Check how much risk you have, compare that to your financial plan, and adjust. An easy way to measure risk: calculate the percentage of stocks and other investments which can have sudden price changes relative to the percentage you have in bonds or cash.
- Look for any single investment that makes up more than 5-10% of your overall portfolio. Unless it's low-risk, seriously consider paring it back. Not convinced? Ask yourself if you can withstand it falling 50% or more. And if you don't think that can happen, ask the shareholders of Enron, GE, Asian stocks in the mid-1990s, hundreds of dot-coms in the early 2000s, mortgage-backed securities in 2008 and travel / cruise companies in 2020 ... to name just a few.
- After steps 1 and 2, stop. Stop checking your investments more than once a month. (Once a quarter is even better.) Stop watching the financial news. It will just make you worry, and you'll learn nothing useful. If you insist on actively trading, keep it to an amount which, if you lost it all, would not hurt your long-term plan.
We're in a strange, heady period for stocks and other higher-risk investments. It will not last forever, and you will not see the next curve coming. So get ready now.
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