| It's obviously a normal reaction for investors (including myself) to feel anxious as we watch all the wild moves in the stock market.
Add in a dose of high inflation and chatter about an inverted yield curve, which can often serve as a warning sign of a coming recession, and you have investors sucking down antacids like candy.
You may panic and feel the need to make changes to your portfolio. Well, sudden declines and sharp rises in the stock market are a normal part of the investing journey, says my friend Mitch Goldberg, a financial advisor and president of ClientFirst Strategy in Melville, New York.
"It's what you do before a plunge that counts, not the hasty reactions that come during and after, when you have no time to think," he said.
To that very point, with inflation soaring above 7% and a recent inversion in the yield curve, investors are most likely wondering whether to tinker with their investment strategy, explains Nick Maggiulli, chief operating officer at Ritholtz Wealth Management, in his guest column for CNBC.
Maggiulli suggests investors review real financial data before making any sudden and risky moves.
Case in point: it can be tempting to reduce your stock allocation in favor of cash or a seemingly much safer U.S. Treasurys, for example, during a period of high inflation and following a yield curve inversion. However, any investor who followed this advice would have underperformed U.S. stocks, and sometimes by a significant margin. The bottom line: Investors looking to take advantage of this turbulent time won't necessarily benefit by moving their allocation to U.S. Treasury bills; rather, he believes shifting to 5-year Treasurys, in inflation-adjusted terms, is actually worse.
And while it's true that the inversion of the yield curve usually means that U.S. stocks will underperform and we will experience a recession within the next 12 months to 24 months, this isn't always the case, Maggiulli points out. For example, if you had cashed out of U.S. stocks following the most recent yield curve inversion in August 2019, you would have missed out on a 68% total return.
Maggiulli also urges investors to continue to keep their eye on the long term: "While high inflation can negatively impact stocks in the short-run, over longer time frames this relationship breaks down."
He also suggests that the best option for investors is to stay the course.
Though it can be tempting to make changes to your portfolio, industry data suggests that most retail investors stay put during a panic time in the market. To that point, only 3% of Fidelity investors stopped contributing to their 401(k) plans and only 11% of Vanguard investors made any active trades during the market crash of March 2020.
Though it may seem like investors panic as economic conditions worsen, the data suggests that skittish investors are typically in the minority, Maggiulli points out.
The key is not to panic. As the Oracle of Omaha, Warren Buffett, warns: "Invest by facts, not emotions."
In the end, he says, "if you cannot control your emotions, you cannot control your money."
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