As of Friday’s close, the S&P 500 was down -0.17% year to date. That’s right—with everything going on, the largest 500 companies in the US’s stock price was down less than a quarter of one percent. In fact, stock darlings Apple and Tesla just announced stock splits, presumably to cool down their high per share prices of ~$460 and ~$1,650 respectively.
Meanwhile, the government is struggling to agree on a stimulus package to address the ongoing Coronavirus impact, and a staggering 30 million people reported they didn’t have enough food to eat according to a Household Pulse survey. Consider that: 1 in 10 people in the United States of America, arguably the most powerful country in the world, are hungry.
How is this even possible?
A great analogy of how the stock market and the economy are linked is that of an owner walking a very excitable, distracted and yappy dog. The dog might stop to sniff something or dash ahead after a squirrel, but eventually is going to end up where the owner is headed.
This is a simple way of looking at things, and doesn’t account for things such as government stimulus, the lack of attractive cash or bond options as well as the fact that many of the companies making up the S&P 500 and the Dow Jones are in fact doing well. It stands to reason though that eventually the buying power of 30 million Americans who can’t afford food right now will reach the stock market.
The big question now is if the economy will change it’s direction by the time the dog (the stock market) is back on track? The very un-exciting answer to this is that no one knows. So what should you do with your investment portfolio?
Structured correctly, an investment portfolio should incorporate risk tolerance (how much volatility an investor can stomach), time frame before funds are needed, plus should be re-balanced regularly to capture market movement. These strategies combine make trying to predict what the market is going to do unnecessary.
When you look at your investment portfolio, ask yourself these 3 questions:
- How much might this portfolio go down? Am I okay with that amount? (a financial advisor typically has software that can calculate this number based on investment holdings)
- When do I need these funds by? A good rule of thumb is that anything needed within 3 years should not be subjected to the stock market.
- Do my investment choices make sense together, and am I making sure that they are staying within a certain % over time to keep a coherent strategy?
Only time will tell how the stock market and the economy will track together. In the meantime, make sure your portfolio is structured correctly and working for you.