4 Investing Strategies to Navigate the Stock Market Right Now

The S&P 500, an index that covers 80% of the entire stock market, has been down about 8% since Jan. 1. The prospect of rising interest rates in response to higher inflation is a looming uncertainty for investors.

Market downturns are notoriously tough on the nerves. That is problematic because anxiety about what may happen can push you into rash, regrettable decisions. Decisions to sell everything or trades made solely to avoid losses usually cause more harm than good.

Whether you’re a new investor or seasoned, having a plan for navigating market volatility can help you stay calm and confident. Try these four smart strategies to get past this cycle without accidentally undermining your long-term performance.

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1. Buy and hold quality

Inflation raises input and borrowing costs. Smaller, growing companies are more reliant on borrowing. They may also have a limited ability to raise prices without losing customers. As a result, growth-oriented businesses can be unpredictable in tough times.

At the other end of the spectrum are brands like Apple ( AAPL -0.94% ), Coca-Cola ( KO 0.68% ), and Costco ( COST -0.45% ). All three have loyal customers who have proven willing to pay a premium (Apple) or accept higher prices (Coke and Costco). These qualities position a business to manage inflation with less volatility.

This doesn’t mean you should dump all small caps or growth positions, however. A small company that’s well-run, makes products people or businesses need, and has access to capital can still be investable.

What you can do is review your portfolio and trim back riskier positions in favor of safer ones. Or, if you’re confident in the overall quality of your stocks, you can sit tight and wait for this cycle to turn around.

2. Stay diversified

Now is not the time to have your wealth tied up in just a few companies. Staying diversified across 25 or more individual stocks in different sectors can greatly reduce your portfolio’s potential for volatility.

You can also diversify sufficiently by holding just a few mutual funds or ETFs. An S&P 500 ETF, for example, provides exposure to 500 of the country’s largest and most successful public companies. Pair that with a fixed income fund for stability, and that could be all you need.

3. Tune out the noise

When the financial headlines get super negative, you may need to give yourself some distance. You might send your investing newsletters into a separate folder in your email, for example. That way, you can review them periodically instead of getting pummeled with disaster news throughout the day.

You can take the same approach with your portfolio. Schedule a time to review it weekly, monthly, or quarterly. Outside of the scheduled review, give yourself permission to ignore the news.

This strategy encourages you to be less reactive and more focused on long-term results. It’s most appropriate when you’re comfortable with the quality and diversity of your holdings — items one and two above.

4. Manage your liquidity

Volatile markets are most damaging when you sell off stocks at temporarily low prices. Protect yourself against that outcome by keeping a healthy balance of cash.

Holding cash can seem counterintuitive when inflation is on the rise. Negative real returns on cash can easily tempt you to shift your cash to something else — stocks, crypto, or even gold.

The thing is, if you face a financial emergency, cash is the surest solution. With cash on hand, you can pay your rent, buy food, and keep the utilities on. Today, you can’t do all those things with stocks, crypto, or gold.

If you think of cash as an insurance policy, the value lost to inflation is your premium. Like an insurance premium, it’s a price you pay for peace of mind.

Tough times call for thick skin

Generally, the worst thing to do when the market gets rocky is panic. If you start considering drastic trades, that’s a sign you’re feeling panicked.

To fend off panic, remember this: There has never been a stock market downturn that wasn’t followed by growth. Plus, you have a high-quality, diversified portfolio. It will recover. The timing of the recovery is uncertain, but it will happen. When it does, you can only reap the rewards if you’re still invested.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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