If you’ve been paying attention to the markets lately, you may have noticed a familiar feeling creeping in: Things are going well… but how long can it last?
We’ve been hearing more questions lately about market highs, potential downturns, and what happens if stocks and bonds fall at the same time. Interestingly, we’ve been here before. Back in January 2022, we recorded an Above Board Podcast episode called “Tail Wagging the Dog.” At the time, we were talking about how easy it is to let short-term market noise influence long-term financial decisions. Then 2022 happened.
Remember 2022?
2022 was an unusual year for investors. The S&P 500 fell roughly 19%, while the Bloomberg U.S. Aggregate Bond Index fell roughly 13%. In other words, stocks and bonds declined at the same time. Inflation was high, the Federal Reserve was raising interest rates aggressively, and many investors watched their portfolios decline across the board. Fast-forward to today, and markets are near all-time highs. It can feel like a completely different world. And that’s exactly the point.
Market conditions are always changing. The reasons for volatility change, too. But volatility itself is nothing new.
Don’t Let the Tail Wag the Dog
The “tail” is the short-term stuff: headlines, scary market days, economic predictions, and the latest news about what the Fed might do. The “dog” is your financial plan.
The problem starts when the tail starts controlling the dog.
A good financial plan doesn’t assume markets will go up every year. It accounts for bad years, market declines, and uncertainty. That’s why having a plan you can revisit and adjust over time is so important. It can also help keep emotions from taking over. One of the biggest risks during a downturn isn’t simply watching your account balance decline. It’s selling out of fear and turning a temporary decline into a permanent loss.
On the other hand, when markets are doing well, it’s easy to take on more risk than you realize. That’s where maintaining a target investment allocation and periodically rebalancing can help keep your portfolio aligned with your plan.
Focus on What You Can Control
You don’t need to predict what the market will do next.
Instead, ask yourself:
- Does my investment allocation still match my goals?
- Has my risk tolerance changed?
- Do I have enough cash or savings for my upcoming needs?
- Is my financial plan still current?
Feeling nervous when markets are near all-time highs isn’t unusual. The important thing is not letting that feeling make the decision for you. We don’t know what the next twelve months will bring. Nobody does. But whatever happens, remember: the tail is still just the tail. Don’t let it drive.
And if you haven’t listened to our original “Tail Wagging the Dog” episode, go back and give Episode 39 a listen. The message is just as relevant today as it was in 2022.