Boom or recession cycle! 5 key lessons in US investing during good and bad times | The Financial Express

Boom or recession cycle! 5 key lessons in US investing during good and bad times

Your investments in the US stock market should be suitably diversified across different asset classes, sectors, and industries.

Boom or recession cycle! 5 key lessons in US investing during good and bad times
If one wants to reap the benefits of equities, one needs to accept the volatility that comes with the markets.

By Viram Shah

2021 was an excellent year for the US markets, and the S&P 500 returned nearly 27%. However, the markets have been volatile in 2022, and the YTD returns for S&P 500 have been a negative 22.51% as of September 23, 2022.
The above figures tell us something fundamental about the stock markets. While there may be a year where you get returns of over 20%, the markets can drop in value by 20% in a short period. Times such as these, when the markets are volatile, urge us to learn critical investing lessons. Here we look at some key lessons in US investing during good and bad times.

Equities are volatile

The biggest lesson, which seems obvious but is often overlooked, is that equities are risky. Investing in equities comes with inherent volatility. And at the same time, they are the most rewarding. When investing in the stock market, you bet on how a company will perform in the next five to ten years. So, there is an element of uncertainty. To earn a return, you must be willing to accept a certain amount of risk. It usually follows that the more risk you are ready to take, the more the possible return. But there is also the chance that you will lose money.

Average returns is not the norm

Since its inception, the S&P 500 has returned 11.82%. In 20 years (from 2001 to 2021), the average annualized return has been 9.87%. Over the long term, equities have given an average return of 8-10%.

However, the lesson here is that ‘average’ is not the norm. In most of the years, the returns are anything but average. We have seen how market returns have differed in 2022 compared to 2021. In 2017 and 2019, the S&P 500 had given returns of 21.61% and 31.21%, respectively. During 2001 (during the dot-com crash), the S&P 500 dropped 11.85%, and in 2008 (during the great recession), the S&P 500 fell by almost 37%!

So, it is essential to note that very high returns in the stock markets are not sustainable. If one wants to reap the benefits of equities, one needs to accept the volatility that comes with the markets. While it may not be easy to see your investments tumble, acknowledging the moody behaviour of Mr. Market (a term introduced by legendary investor Benjamin Graham) is an important lesson for investors.

Also Read: US PMI data signals better days ahead for the US stock market investors?

Invest for long term

One should invest in the stock markets with a sufficiently long-term horizon. If you are investing for a short term (for a year or less), you are at best estimating whether your investment will go up or down a year later. Most investors lose money because they invest with a short-term horizon.

Know where you invest

Before investing in a stock, you should have adequate knowledge about the company and the industry. Making an investment based on what your friends are investing in or a hot tip on social media is likely to backfire. If you want to invest in a company that belongs to an industry that you do not understand (for example, genomics), you can invest through an ETF.

Also Read: S&P 500 companies earnings growth in the next quarter to be in focus from now on

Be diversified

Finally, your investments in the US stock market should be suitably diversified across different asset classes, sectors, and industries. For example, if your portfolio is concentrated in high-risk technology or healthcare stocks, you stand to lose money when these sectors perform poorly. Investing lessons are just like lessons on how to stay fit. Whether it is a boom or a bust cycle, following those will stand you in good stead.

(Author is Co founder and CEO, Vested Finance)

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