With the new year finally here, there’s hope on the horizon that good news will come with it. However, there’s also no way of knowing for sure what 2021 has in store for the stock market.
While it’s entirely possible that stock prices may hold steady in the new year, the possibility of a market crash or worse cannot be ignored either.
Especially in the uncertain times we live in now, your overarching strategy for 2021 should be to prepare for all realistic possible scenarios. In this article, we’ll explore the top five changes you can make to your investment strategy early this year to make that happen.
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- Stay as diversified as possible
Diversification is the best strategy for avoiding a total portfolio failure. Even if one industry you are invested in suffers due to the economic climate, being diversified into different and uncorrelated industries as well may save you.
To protect against potential volatility and stay diversified, ensure that you are invested in a number of different market segments. Taking this concept further, allocate your assets appropriately for who you are. If you’re in your twenties or thirties, you can afford to take on more risk and correlation within your portfolio. However, someone close to retirement may wish to further diversify their risk this year.
Consider the fact that by the time the average investor reacts to the market, most of the damage is already done. Unless you’re a professional investor, you probably won’t beat the market. Keeping your portfolio diversified, both in domestic stocks and broader assets (such as bonds or foreign stocks) will help protect you from unforeseen stock market volatility in the new year.
- Don’t overwhelm yourself
Assuming you are a beginner investor, it’s best not to overwhelm yourself in the new year. Following the pandemic, it will be difficult to predict exactly which companies or sectors will perform well. Investing in accounting software that can help you keep track of your investments is crucial. You should also consider investing in an exchange-traded fund (ETF) as well.
Doing so means you are essentially buying numerous different stocks spread out across certain markets. There are ETFs for individual sectors, such as technology or healthcare, and there are also ETFs that track the major market indexes such as the Vanguard S&P 500 ETF. Choosing to go down this road requires less effort on your part, as professionals constantly rebalance ETFs in an effort to improve the fund.
Some investment and trading platforms even offer features such as pre-built ETF portfolios and market research support into which funds may be best for your investing strategy.
According to financial analyst and wealth advisor Tim Fries of The Tokenist, it’s important to learn about what the stock market actually is before you begin investing or trading, pointing out that “the stock market isn’t just companies and their shares. Tradable assets also include ETFs, mutual funds, bonds, commodities, and an endless list of derivatives that hardly seem sane once you figure out what they are. Getting familiar with these and learning about how the markets respond to world events is a good first step.”
- Consider rebalancing
If you aren’t an ETF investor and prefer to build your own portfolio, there is action you can take. Choosing to rebalance your portfolio at the start of this new year could be an excellent strategy. There are certain sectors, such as airlines or energy, that may not even recover in 2021.
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Adjusting your portfolio asset allocation to account for this may help stimulate growth in your portfolio by reducing the weight of these suffering industries. Visit them again when they recover to determine if you want to re-adjust.
There are a number of sectors predicted to stay hot in the new year and altering your portfolio percentages to reflect these trends might be a smart opportunity. While rebalancing your portfolio, consider evaluating the investing platform you use as well. Make sure you have a handle on all the features available to you and how your platform works.
- Avoid the short-term
There will certainly be volatility within the stock market in 2021, but the fallout from the pandemic will also make predicting the timing and magnitude of these volatilities difficult. This is why it will likely do short-term investors good to consider looking into the long-term until the effects of 2020 are fully dissipated. This isn’t to say you shouldn’t make investment decisions in 2021, just that it could be smarter to make these decisions more forward-thinking.
There are a number of industries that may bounce back in the coming years and taking preliminary investing steps in 2021 may benefit you in the long-run once those industries recover. For perspective, in an 87-year period from 1928 until 2015, the S&P 500 managed to return an average of 9.5% per year, whereas short term holdings such as three-month Treasury bills only returned 3.5% on average.
With the future of the market in 2021 so difficult to predict, switching your investment outlook to the long-term, for the time being, may help against some of the impending short-term volatility.
- Reevaluate your risk tolerance
Finally, consider reevaluating your risk tolerance in 2021. The coronavirus crash from February to April of last year shook the market, but fortunately many portfolios were able to recover.
Nonetheless, it still warrants looking at how your own portfolio responded at the time. Ask whether or not you were comfortable with that performance and the risk exposure within your portfolio during those months.
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If you weren’t happy, alter your investing strategy in 2021 to reflect your new risk tolerance.
For beginner investors, look at critical information such as how much time you have or the different types of trading one can engage in to determine the amount of risk you’re willing to take on.
Establish your risk tolerance for the new year as soon as possible so that you can begin to map out what your overall investing strategy will be.
Conclusion
As mentioned, there’s no way of knowing for sure what this year will hold in store for the stock market. Regardless of whether the market is volatile or steady, preparing your portfolio for success should always be at the forefront of your mind.
Watch out for factors such as shifting industry trends and keep your portfolio up to date and performing strongly regardless of the state of the market. The new year may be unpredictable, but using the five above tips can help you be ready for any situation your portfolio may face.
