Why You Should Ignore the Stock Market in 2020
The past year has been stressful at best for investors of all levels. The Federal Reserve has cut interest rates several times after years of growth. President Trump is indeed leaning towards his trade war with China. The stock market has reached several notable highs and lows. Financial experts used the word “recession” so often that we had to break down the factors to look out for in case they were right in suspecting we were getting close to one of them.
While the recession chatter has subsided, 2020 is still getting off to a tumultuous start. We had a few days to discuss the situation in Iran – whether we will or not – the Dow Jones has hit 29,000 twice, we have struck a trade deal with China, and all eyes are on the 2020 presidential election, which is getting closer and closer.
And if you look too far into the financial columns, you will go mad. Marketwatch said it will remain bullish this year. Yahoo Finance had the most unhelpful headline: “Most experts predict profits, some expect losses.”
So who should you trust?
The answer may surprise you. The answer is yourself.
I’m not going to resent you, but when it comes to investing confidently this year, you ultimately do your best. I spoke with several investment experts about what to consider when studying a year that is sure to be far from boring.
Don’t Fear The Great Recession II
If you are the type of person who involuntarily flinched every time they heard the word “recession” last year, you are far from alone. Investors have biases that develop based on their formative years, said Dan Egan, managing director of behavioral finance and investment at online investment firm Betterment .
These memories from 2008 can still cause nightmares, but you shouldn’t limit your egg raising efforts because of them. “People who have gone through the last recession tend to focus too much on it,” he explained. “That crash and recession was so big and frustrating that we forget that it happened just twice in 120 years.”
Since you can’t see the future, your smartest move is to diversify and essentially own your own business. “The best defense against a wide range of consequences is to stay diversified and understand your risk tolerance,” said Anthony Saglimbene, global market strategist at Ameriprise Financial .
At least pretend you don’t care
If you’re worried about a recession approaching, “you might need to rethink your asset allocation,” said Brandon Renfroe , professor of finance and finance at East Texas Baptist University. “If you’re in the right distribution, you probably wouldn’t be so worried.” If you’re nervous about where the economy is heading, reduce the level of risk in your portfolio by switching part of your allocation from stocks to bonds.
Renfro said clients will ask him if he thinks the market will continue to do well if Trump is re-elected in the fall. “I don’t think about it,” he explained, asking them instead, “How would you feel if this happened?”
To gauge your risk tolerance, don’t think about wasted income. Think of all possible negative scenarios, Saglimbene said. He recommends asking yourself two questions:
- How much can my investment fall in value at any given time without causing me to make significant changes to my portfolio?
- Can I sleep at night if my investments have dropped by X% (fill in the field)?
And don’t forget your timeline as well. Asset allocation should be highly dependent on your age and time to retirement.
Rather than diving into the day-to-day political drama this year, Renfro recommends – if you really have to think about the markets – watch the Schiller’s P / E ratio, also known as cyclically adjusted price. Profit to Earnings Ratio (CAPE) or P / E 10.
The higher the ratio, the lower the return you can expect in the future; if it’s a lower ratio, you can expect a higher return. This is by no means a guarantee; it is just another predictor of long-term results based on stock market assessments. Right now, this ratio is quite high, which indicates modest future profits.
Renfro emphasizes that don’t use Schiller’s P / E ratio to determine market timing , but use it to reflect on your risk tolerance. And don’t resist if you feel your risk tolerance is changing.
“Maybe you felt better when you allocated your assets in the middle of a bull market,” he said. “You may be confused thinking that you have a higher risk tolerance than you actually do.” Your optimism (or pessimism) about your portfolio does not have to be permanent for your investment to grow.
Focus on what you can control
Egan said that when it comes to finance, truly successful people “can distinguish between things that they can control and predict with a high degree of confidence and those that they cannot.”
One way to feel like you are in control is to focus on investing in yourself rather than worrying about the markets. Egan said that many people feel attached to their careers by the age of 25 or 30 and stop making those informed investments that can propel their careers upward, rather in terms of skill set or compensation. If you want to feel more comfortable this year, can you negotiate a pay raise? Get a certificate? Take on the side hustle and bustle you are passionate about?
By strengthening your monetary situation outside of the markets, you can more confidently make decisions about your investments (including retirement plans with tax benefits through your employer).