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Published: Jun 16, 2022 6 min read
Photo illustration of an investor choosing where to put his money, either in the green or in the red.
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Wall Street was initially cheered by the 0.75% rate hike announced by the Federal Reserve on Wednesday — a drastic step to rein in soaring prices — but the euphoria may be short-lived. As the implications of the decision sink in, many investors remain worried about the potential for a recession.

Their biggest concern? The central bank is hoping to tamp down inflation currently running at 40-year highs by making it more expensive to borrow money, which could put a drag on consumer and commercial economic activity. Keith Buchanan, senior portfolio manager at Globalt Investments in Atlanta, says that in addition to raising rates, the Fed "also indicated that they see a slower economy going forward."

Those conjoined expectations — reduced growth combined with higher rates — are rattling traders and novice investors alike.

While investors today have myriad opportunities to enter the market at a lower cost than ever thanks to innovations like fractional shares and the rise of commission-free trades, this also means that many people are plunging straight into the deep end of the pool. Now that the market is trending down, many investors, especially younger ones, find themselves in uncharted territory.

If you’re worried about your stock portfolio or 401(k) weathering what could turn out to be a historically hawkish cycle of policy tightening, experts have a few pieces of advice.

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Keep a cool head

“The most important advice is don’t panic. We know that equities build wealth over time,” says Rob Saba, senior portfolio manager at Horizon Investments in Charlotte, North Carolina. "We just haven't seen anything like this for quite some time."

Historical market activity backs up this advice. According to J.P. Morgan Asset Management's latest guide to retirement, seven of the best 10 days the S&P 500 had over a 20-year stretch between 2002 through 2021 took place within two weeks of the index’s 10 worst days.

If you panicked and yanked your money out of stocks right after they took a swan dive, you would miss those rebounds.

“Oftentimes, the most destructive decision one can make is to panic and sell out of markets," Saba says.

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Anticipate volatility

Jack Manley, a global strategist at J.P. Morgan Asset Management, told Money recently the recent influx of retail investors combined with algorithmic trading that can execute massive amounts of trading volume in a flash has led to a choppier market.

"The pendulum in the stock market swings very, very wildly," he said.

Experts say volatility will remain a feature of market activity as participants digest the implications of higher interest rates — and try to determine who wins and who loses as a result.

“We’ve seen credit spreads widen as corporate bonds bake in a more difficult macroeconomic environment,” Globalt's Buchanan says.

This means that sectors that rely on debt financing, like real estate investment, will face greater challenges. Struggling companies with high debt loads will find it more expensive to refinance and service variable-rate debt. Case in point: On Wednesday, beauty company Revlon cited its high debt as a reason for its Chapter 11 bankruptcy filing.

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Look for opportunities

Investing pros urge investors to adopt a glass-half-full mindset: A bear market means investors can buy stocks for less... and potentially pick up bargains.

“This period will offer opportunities to get invested in certain industries, sectors and asset classes that now seem to be untouchable or undesirable,” Buchanan says. “Investing on a continuous basis and having a disciplined approach to markets generally pays off in the longer term.”

If you have cash to deploy, Saba suggests you might want to "nibble away at things that look attractive."

"Dollar-cost averaging is the best mode of investing, particularly in times of emotional and even panicked selling periods," Buchanan adds. "As we've seen, the market tends to just cascade down," and that sentiment-driven momentum can sweep up companies with strong balance sheets along with weaker ones.

This is where you should look for chances to acquire strategically.

Check your investment mix

Disruptive market events are a good time to evaluate your asset allocations to make sure they are in line with your long-term wealth-building goals and your risk tolerance. Depending on your level of comfort with volatility, your time horizon for retirement and your anticipated financial needs, you should be invested in a mix of stocks, bonds and cash.

“Revisit what your goals are [and] what you’re trying to accomplish, especially if you have not revisited your portfolio in six to 12 months,” Saba advises.

Your stock investments should be diversified, as well. You should have companies of various sizes represented — that is, small-cap and mid-cap in addition to large-cap stocks. Different industries thrive under varying economic conditions, so having sectors like health care, technology, consumer staples and industrials ensures that your portfolio has a chance to grow in all kinds of markets.

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