The U.S. economy is officially in the midst of a recession, and some investors may be worried about what that means for their money.
The stock market doesn't currently seem to be aligned with what the rest of the economy is doing. Despite the recession and fears of a second wave of the coronavirus pandemic slamming the nation, stock prices have been surging over the last few weeks. While that may seem like positive news, it could actually be dangerous because it means the market is volatile and susceptible to another crash.
Nobody knows exactly what the future has in store for the economy or the stock market, but does that mean you need to adjust your investment strategy to account for this uncertainty? Here's when you should -- and shouldn't -- change your plans.
In general, it's best to stay the course
The stock market is on the upswing right now, but another crash could be on the way. That could make it tempting to pull your money out of the stock market to try to get ahead of a potential downturn -- but that might be a risky move.
Timing the market is nearly impossible, even for the most experienced investors. Especially right now, when the market's wild ups and downs are so unpredictable, it's tough to say whether there will even be another crash -- and if there is, when exactly it will happen. So trying to pull your money out of the market at precisely the right moment will be extremely difficult. Withdraw your cash too early, and you'll miss out on potential gains if the market continues to surge. But wait too long, and you could miss your opportunity if the market crashes before you withdraw.
For that reason, it's best to leave your money alone and simply ride out the storm. If you've still got years before you plan to retire, your investments will have time to recoup their losses if there's another crash. Even the worst recessions don't last forever, so you can count on seeing your investments rebound eventually no matter what happens with the market.
When you should consider adjusting your strategy
While it's not advisable to withdraw your cash from the market entirely, sometimes it is a good idea to consider tweaking the investments within your portfolio to account for your tolerance for risk.
When you still have plenty of time left before retirement, your investments should lean heavily toward stocks and less toward more conservative investments such as bonds. Stocks are riskier, which makes them more susceptible to market swings, but they also experience much higher rates of return than "safer" investments. So although your investments may lose value during market downturns, when you still have decades to save, your savings will recover relatively quickly.
However, as you get older, you should be adjusting your asset allocation so that your portfolio is weighted more toward conservative investments like bonds and less toward stocks. If you do this, your investments shouldn't take a nosedive during market downturns like they would if you were invested heavily in stocks -- which is good, because when you're close to retirement you don't have as much time to allow your investments to recover.
Take a look at your current asset allocation and consider whether it aligns with your risk tolerance. If you're just a year or two from retirement and your portfolio is comprised primarily of stocks, it may be a good idea to make some adjustments to be more conservative. On the other hand, if you have decades until retirement and you're investing very little in stocks, investing more aggressively could pay off in the long-term. Play it too safe, and it will be much harder to reach your savings goals.
Planning for an uncertain future
It can be challenging to create a long-term financial plan when nobody knows what will happen next year, next month, or even next week. While you may have no control over what the stock market does, you can control how you manage your investments. By staying calm and avoiding rash decisions, you can ensure you're setting yourself up for financial success.