Market cycles can be erratic and impossible to foresee. A market peak or valley may not be obvious until months after it happens, so it's important to understand how market cycles and market risk can affect your portfolio performance.
No investment is immune from stock market cycles
Stocks, bonds, cash equivalents and real estate. Every asset class can be affected by cyclical patterns.
However, different types of investments tend to move in opposite directions as a result of changes in the market. For instance, in a good or improving economy, stocks tend to increase in value and bond prices typically decline. During an economic downturn, stocks tend to decrease in value and bond prices rise.1
Economy and politics drive cycles
Market ups and downs are often affected by economic and political conditions.
Stock and real estate markets typically do well in a growing economy. Cuts in taxes and interest rates, high employment, political stability and increased corporate profits also can mean rising stock values.
Bond markets historically do well during times of political uncertainty. Moderate inflation, international conflicts, a volatile stock market and tight money supply often are a boon to bond markets.
Three ways the market can react
- A correction. A sudden drop of 10% in the major market indexes. After a correction, stock prices tend to more realistically reflect a company's growth and earnings potential.
- A crash. A market keeps dropping, maybe 20% or more, in a short period accompanied by widespread selling.
- A bubble. Overly optimistic investors drive stock prices to unsustainable levels. Although it may take a while, post-bubble stock prices often deflate, giving investors the opportunity to buy at bargain prices.
Risks of investing internationally
Economic and political conditions in other countries can also impact your investments, even if you’re not invested internationally. International market risks include:
- Political risk. Changes to government and political systems can wreak havoc on a nation's investment markets.
- Currency risk. Exchange-rate fluctuations can boost or limit investment returns. A rise in security prices can be offset by a decline in the value of the currency.
- Market risk. Many overseas markets are characterized by wide price swings.
Navigating market fluctuations
In turbulent economic times, you may be tempted to do something drastic such as cutting the contribution to your retirement plan or even pulling out of the market altogether.
If you’re investing for a long-term goal, keep these points in mind:
- Focus on long-term goals. Funding your retirement is a long-term endeavor. Looking at the changes on a day-to-day basis can be alarming, but historically the American economy has been shown to be pretty resilient.
- You may miss a major market upswing. It’s normal to experience market ups and downs. If you pull out of the market or stop contributing when the market is down, you’d be selling low and missing out on potential market upswings.
When you invest for long-term goals, such as retirement, make sure to account for the impact of inflation on your money.
Conservative investments like certificates of deposit and money market funds may provide a margin of safety in a volatile market. They may be OK for short-term financial goals that don’t have time to weather market downturns. But they may not offer enough growth to beat inflation over the long term, leaving you with less purchasing power.
Be sure to talk to your investment professional about Nationwide products that could help you meet your long-term goals. And keep in mind that all investing involves market risk, including possible loss of principal. Your investment professional can help you set up a long-term investment plan that takes inflation risk into account.