Around the world, people are worried that trade disputes could hurt the economy. Markets have gotten nervous as countries put tariffs on each other's goods, especially between the U.S. and China. As a result, stock markets have fallen globally, and many investors are moving their money to safer investments like bonds.
Like in sports, successful investing needs both offensive and defensive strategies. Playing defense means having investments that can handle different market conditions. Since market ups and downs and unexpected events will always happen, it's important to stay prepared.
Playing offense means finding good opportunities when market conditions change. While market uncertainty can feel scary, these times often offer better prices for investments. A good investment plan needs both approaches. How can investors protect themselves while also taking advantage of opportunities in today's market?
Two basic rules of investing are spreading your money across different investments (diversification) and investing for the long-term. Look at how different combinations of stocks and bonds have performed over various time periods. For example, in a single year, stocks can swing dramatically - from gaining 60% in 1983 to losing 41% during the 2008 financial crisis.
Looking at longer time periods and mixed portfolios shows why these principles work. Having both stocks and bonds might lower your maximum possible returns, but it also reduces risk. For example, this year while stocks are down 13%, a mix of 60% stocks and 40% bonds only fell 4.6%.
Remember, the goal isn't just to grow money as fast as possible, but to have the best chance of reaching your financial goals. A mixed portfolio typically has more predictable results, making it easier to plan for the future.
Also, investing for longer periods can greatly improve your results. Since World War II, there hasn't been a 20-year period where these types of portfolios lost money on average. While past performance doesn't guarantee future results, this shows why long-term thinking is important.
The VIX index, which measures market fear, shows that worry spikes periodically. These peaks match times when markets drop sharply, like in 2008 or 2020. During these times, many people feel the situation will never improve.
While no one can predict short-term returns, history shows that the best opportunities often appear when investors are most worried. As famous investor Warren Buffett says, "be fearful when others are greedy, and greedy when others are fearful."
This is especially true when market problems are about temporary cash flow (liquidity) rather than permanent financial trouble (solvency). Sometimes prices fall simply because some investors need to sell quickly, even when the investment's fundamental value hasn't changed. These situations can create opportunities for patient investors.
This doesn't mean you should try to time the market. Even when fear is high, markets might not recover quickly. Instead, think about your overall investment mix. Market drops often mean better prices, so it might make sense to buy rather than sell. Of course, what's right depends on your specific situation.
Bonds have helped protect portfolios this year as interest rates fell, helping to offset losses in other investments. Bonds typically have smaller price swings than stocks and often move in opposite directions. This is why investors say "bonds zig when stocks zag." Having investments that move differently helps prepare for difficult times.
After several years of strong stock market gains, prices are now a bit more reasonable. While the impact of tariffs on company earnings is still unclear, the price-to-earnings ratio of the S&P 500 has fallen to 20.7x. Some market sectors like Technology, Communication Services, and Consumer Discretionary have seen bigger price drops.
Interestingly, traditional safe-haven investments like gold have struggled lately. Gold prices hit new records earlier this year, rising over 10% in twelve months. Investors often buy gold for the same reasons they buy bonds - as protection during uncertain times. However, gold prices have fallen as economic worries affected all commodities. This shows why it's important to spread money across different types of investments rather than focusing on just one.