The most recent employment statistics have contained both alarming and encouraging figures alongside one another, and the uncertainty looking forward makes investing an even more difficult endeavor than usual.
It's easy for investors to fall prey to fear about the current circumstances or get wrapped up in irrational optimism about the 2020 rebound and charging tech stocks. It's important right now to separate fact from opinion and make smart, principle-based decisions that should optimize long-term performance.
Nothing but the facts
Investors should be careful to separate facts from conjecture right now. Some important objective truths are key economic indicators, as well as data about COVID-19 cases and the current status of prevention and treatment measures.
Continued unemployment claims measure the number of people who previously filed for unemployment and have remained unemployed in the current week. Continued claims were around 5.3 million on Dec. 12. That was the lowest number since mid-March, and far below the 22 million figure in early May. However, it's roughly triple the number of continued claims filed in February, and it's not too far below the 6.6 million reported at the extreme depth of the global financial crisis in 2009. Things have improved substantially from the start of the pandemic, but the situation is still dire for many Americans.
Despite this, most equity indexes are at or near all-time highs. Utilities, energy, and financials are the only major sectors that are down for the full year after a major marketwide correction in Q1. Investors have remained confident in U.S. equities due to supportive fiscal and monetary policy and faith in a 2021 recovery. Low interest rates and a lack of attractive alternatives have also kept capital from flowing elsewhere. Valuation ratios are now well above historical averages in most cases.
Nothing about these facts should cause you to panic or be blindly optimistic. In uncertain times like these, it's best to sharpen your pencil, review your risk tolerance, and fine-tune your asset allocation.
Follow the rules and prosper
The best long-term portfolios are balanced and diversified. Over the span of a decade or two, every type of stock will likely have its day. You'll want exposure to those high-growth names during bull markets, but you'll want countercyclical and defensive positions when the market goes through a tough patch.
Many question whether these principles apply to investors today, but they do. We can make some educated guesses based on current conditions and historical results, but it's exceedingly difficult to make specific predictions about the future and time them properly. You're much more likely to find success by adhering to some established allocation principles.
For instance, if it looks to you that tech stocks or consumer discretionary companies with lofty valuations seem likely to sputter if an economic recovery is delayed, then taking a portion of your gains from these holdings and reinvesting in more defensive stocks like consumer staples or utilities could be a good move.
However, be careful not to overreact. Supportive economic policy, an effective vaccine, and a rapid recovery could all combine to keep the market growing for the foreseeable future. It would be a shame to completely exit all your growth positions if that happens.
Investors should take risk tolerance questionnaires and carefully consider their time horizons, and use this information to allocate the appropriate amount to bonds and different types of stocks. Ideally, portfolios should have some exposure to stocks from numerous industries, different countries, and companies of various sizes. Long-term allocations shouldn't rely too heavily on the performance of any one sector, and strong returns in one year don't necessarily mean that a stock will continue to thrive in the future.
It's too easy to react emotionally to economic uncertainty. Don't let your long-term investments fall prey to medium-term conditions.