A valid case can be made that the economy and the market are always operating with some level of inherent craziness. Investors should remember this when they hear experts talk about “normal conditions.” It’s challenging to know what, exactly, “normal” looks like.
But data shows that the current environment is full of heightened uncertainty. The CBOE Volatility index, at 20.6, is at its highest level since April (excluding last week’s surge).
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Adding to the worry is CNN’s Fear and Greed index. It’s currently indicating “fear.” A week ago, it was at “extreme fear,” the most bearish sentiment indicator it has.
Investors can view this information in one of two ways. You could take a conservative approach, selling your holdings, moving to cash, and waiting until the situation stabilizes. Or you could view things with a long-term lens to gain a better perspective.
I believe the latter strategy is the best move. Follow these three steps to protect your portfolio.
Don’t sell in a panic state
The artificial intelligence (AI) trade, which has generated enormous returns for investors who started riding the trend a few years ago, is causing concern. So much of the stock market’s capitalization is concentrated in a small group of technology businesses, all generally with heavy AI exposure, that any slowdown in spending or revenue could trigger a downturn. I’m sure this is on investors’ minds right now.
When uncertainty is high, investors can enter flight-or-fight mode. The immediate reaction might be to sell stocks in a panic state. Getting on the sidelines and moving to cash can provide some peace of mind. The plan is to wait until things normalize.
This would be a terrible mistake. Those who follow this path are basically trying to time the market. While it sounds like a smart strategy, it can be harmful to your portfolio. The best investors are able to stomach the volatility, as they understand that ups and downs are all a part of the wealth-building journey.
Maintain adequate diversification
It’s impossible to neglect how much the technology sector has driven the overall market’s gains. The Vanguard Information Technology ETF has produced a total return of 716% over the last 10 years (as of Nov. 10). If you invested $10,000 in this fund at the beginning of that run, you’d have almost $82,000 today. After learning about this track record, investors might want to further increase their tech exposure.
