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The state of the economy in the early days of 2023 is uncertain, which might have you questioning your investment strategy. Depending on your current approach, however, you may not need to make any changes. At the very minimum, consider reassessing your risk tolerance if economic conditions change, but try to avoid significant adjustments to your investing approach.
Should I Change My Investing Strategy in 2023?
The stock market didn't perform well in 2022, with the S&P 500 having had its worst year since 2008, when the Great Recession wiped out nearly 40% of the index's value.
As 2023 begins, some economists and analysts are warning of a looming economic recession, which could lead to more volatility in the market, though there's hardly a consensus on the matter.
It remains to be seen what the market will do in the next 12 months, and it's important to focus on your situation and goals to determine the best course of action as the year unfolds. For example, if most of your investments are in a retirement fund and you're still relatively young, it likely doesn't make sense to make immediate adjustments based on short-term volatility.
On the flip side, if your time horizon is shorter—you're retiring in the next few years, for instance—and preserving your capital is your top priority, it might be wise to shift your assets toward safer investments.
Ultimately, the most important thing is to avoid making rash decisions, such as panic selling, that you could regret later on. It may be tempting to try to time the market, but doing so perfectly is nearly impossible, and it could lead to more losses.
Regardless of your current strategy, now might be an excellent time to work with a financial advisor who can provide personalized and objective advice about how to best accomplish your goals.
Tips for Investing in an Uncertain Economy
While you may not know what to expect in the year ahead, there are some steps you can take to improve your odds of weathering the storm.
Make Investing Automatic
Dollar cost averaging involves investing the same amount on a recurring frequency (once a month, for instance) regardless of how your portfolio is performing. Over time, it can even reduce your average cost basis, thereby increasing your long-term gains.
And if you incorporate your goals into your budget with automatic contributions, you won't have to worry as much about other expenses eating into your investment opportunities.
This process is simple if you have an employer-sponsored retirement plan because you can ask your payroll manager to take deductions from your paycheck. If you're contributing to an individual retirement account, brokerage account or some other type of investment account, you can set up automatic monthly transfers from your bank account.
Diversify Your Portfolio
A common technique for reducing your exposure to risk is to diversify your portfolio across different assets. For example, certain stock sectors, including utilities, health care and consumer staples, tend to outperform retail, travel and hospitality stocks during rough economic times.
You can also look for ways to diversify your portfolio across different asset classes. For example, Treasury securities and bonds may not offer high returns, but they won't go negative. Consider a wide range of financial instruments to try to minimize your risk without limiting your potential for gains too much.
Understand Your Risk Tolerance
Your risk tolerance is the level of risk you're willing to take as an investor. It can be swayed by a variety of factors, including the timeframe for when you need to access the funds you're investing. If your main desire is to protect your investments so you can soon tap them in retirement, your tolerance for potential loss is likely quite low.
As you determine your investment approach, consider how willing you are to risk your money in exchange for the potential for higher returns.
Online risk-tolerance questionnaires can help you get a better understanding of where you stand. In general, the most important thing is to think about how you feel about how your money is currently invested and how economic uncertainty could impact your goals.
Consider Working With a Financial Advisor
Financial advisors typically have a deep understanding of the market and are on top of the latest news from experts, analysts and economists. As such, they're well equipped to help you make good investment decisions based on your personal situation, needs and objectives.
You'll typically need to pay a fee to work with an advisor, but the upfront cost can be worth it if it can help you avoid far costlier mistakes that can occur if you make emotional decisions about your investment portfolio.
As you search for an advisor, consider focusing on fee-only advisors who are compensated only for their advice rather than commissions based on products they sell you.
Look at Other Ways to Protect Your Financial Health
During a period of economic uncertainty, maintaining a good investment strategy is important—but it's only one piece of your financial plan. Other ways to prepare your finances for a potential recession include evaluating your budget and cutting back on discretionary spending, paying down debt and building your emergency fund.
It's also a good idea to monitor your credit and take steps to improve your credit score in case you need to borrow money to get by. While there's no surefire way to predict the direction of the economy, these steps can help you bolster your financial position and improve your odds of avoiding a personal financial catastrophe.