Markets

Four keys to riding the market's ups and downs Let time work in your favor. Let the market worry about itself. Financial markets are unpredictable. No matter how much research you do and how closely you follow the news, trying to “time the market” usually means withdrawing too early and investing too late. In this guide, we’ll explain: Why a long-term strategy is often the best approach The problems with trying to time the market How to accurately evaluate portfolio performance How to make adjustments when you need to Why a long-term strategy is often the best approach Watch the market closely, and you’ll see it constantly fluctuate. The markets can be sky high one day, then come crashing down the next. Zoom in close enough on any ten-year period, and you’ll see countless short-term gains and losses that can be large in magnitude. Zoom out far enough, and you’ll see a gradual upward trend. It’s easy to get sucked into market speculation. Those short-term wins feel good, and look highly appealing. But you’re not trying to win the lottery here—you’re investing. You’re trying to reach financial goals. At Betterment, we believe the smartest way to do that is by diversifying your portfolio, making regular deposits, and holding your assets for longer. Accurately predicting where the market is going in the short-term is extremely difficult, but investing regularly over the long-term is an activity you can control that can lead to far more reliable performance over time. The power of compounding is real. By regularly investing in a well-diversified portfolio, you’re probably not going to suddenly win big. But you’re unlikely to lose it all, either. And by the time you’re ready to start withdrawing funds, you’ll have a lot more to work with. The basics of diversification Diversification is all about reducing risk. Every financial asset, industry, and market is influenced by different factors that change its performance. Invest too heavily in one area, and your portfolio becomes more vulnerable to its specific risks. Put all your money in an oil company, and a single oil spill, regulation, lawsuit, or change in demand could devastate your portfolio. There’s no failsafe. The less you lean on any one asset, economic sector, or geographical region, the more stable your portfolio will likely be. Diversification sets your portfolio up for long-term success with steadier, more stable performance. The problems with trying to time the market There are two big reasons not to try and time the market: It’s difficult to consistently beat a well-diversified portfolio Taxes Many investors miss more in gains than they avoid in losses by trying to time a dip. Even the best active investors frequently make “the wrong call.” They withdraw too early or go all-in too late. There are too many factors outside of your control. Too much information you don’t have. To beat a well-diversified portfolio, you have to buy and sell at the perfect time. Again. And again. And again. No matter how much market research you do, you’re simply unlikely to win that battle in the long run. Especially when you consider short-term capital gains taxes. Any time you sell an asset you’ve held for less than a year and make a profit, you have to pay short-term capital gains taxes. Just like that, you might have to shave up to 37% off of your profits. With a passive approach that focuses on the long game, you hold onto assets for much longer, so you’re far less likely to have short-term capital gains (and the taxes that come with them). Considering the short-term tax implications, you don’t just have to consistently beat a well-diversified, buy-and-hold portfolio. In order to outperform it by timing the market, you have to blow it out of the water. And that’s why you may want to rethink the way you evaluate portfolio performance. How to evaluate portfolio performance Want to know how well your portfolio is doing? You need to use the right benchmarks and consider after-tax adjustments. US investors often compare their portfolio performance to the S&P 500 or the Dow Jones Industrial Average. But that’s helpful if you’re only invested in the US stock market. If you’re holding a well-diversified portfolio holding stocks and bonds across geographical regions, the Vanguard LifeStrategy Funds or iShares Core Allocation ETFs may be a better comparison. Just make sure you compare apples to apples. If you have a portfolio that’s 80% stocks, don’t compare it to a portfolio with 100% stocks. The other key to evaluating your performance is tax adjustments. How much actually goes in your pocket? If you’re going to lose 30% or more of your profits to short-term capital gains taxes, that’s a large drain on your overall return that may impact how soon you can achieve your financial goals. How to adjust your investments during highs and lows At Betterment, we believe investors get better results when they don’t react to market changes. On a long enough timeline, market highs and lows won’t matter as much. But sometimes, you really do need to make adjustments. The best way to change your portfolio? Start small. Huge, sweeping changes are much more likely to hurt your performance. If stock investments feel too risky, you can even start putting your deposits into US Short-Term Treasuries instead, which are extremely low risk, highly liquid, and mature in about six months. This is called a “dry powder” fund. Make sure your adjustments fit your goal. If your goal is still years or decades away, your investments should probably be weighted more heavily toward diversified stocks. As you get closer to the end date, you can shift to bonds and other low-risk assets. Since it’s extremely hard to time the market, we believe it’s best to ride out the market highs and lows. We also make it easy to adjust your portfolio to fit your level of risk tolerance. It’s like turning a dial up or down, shifting your investments more toward stocks or bonds. You’re in control. And if “don’t worry” doesn’t put you at ease, you can make sure your risk reflects your comfort level.

What’s in store for the market in 2024? A look at how the market might fare in the months ahead. “Predicting is very difficult,” the physicist Niels Bohr once said. “Especially about the future.” With the benefit of hindsight, we now know that many of the predictions made about the economy a year ago missed the mark. Decades-high inflation, sparked by the pandemic, had pushed monetary policymakers to aggressively hike interest rates. Many analysts expected those higher rates to slow the economy, with a recession likely right around the corner. But thus far, the recession remains a mirage. And it may not feel like it, but broadly-speaking the economy did alright in 2023: Inflation slowed in the U.S., from 7.1% to 3.1% year over year1 U.S. stocks rebounded, up 23.9% in 20232 Employment remained strong 1Consumer Price Index data. Source: BLS, FRED, Bloomberg. 2CRSP U.S. Total Stock Market Index data through December 13th, 2023. Source: Bloomberg. For savers and investors, this illustrates the significance of not allowing short-term fears and economic tremors to distract from the discipline of allocating money to a diversified portfolio of financial assets and keeping an eye on the long-term. Just as deciding to sell stocks in 2020 due to the pandemic’s effect on the market would have caused one to miss out on the 2021 bull market, selling in 2022 based on recessionary fears would have prevented exposure to 2023’s gains. So once again: Predicting is very difficult. Yet now we train our eyes, humbly so, on 2024 and offer our analysis on where the market is headed. Reasons for optimism The Fed repeatedly raised rates over the last two years to slow spending and bring inflation back under control. So while rates remain high, inflation is looking better and, encouragingly, appears set to drop to the 2% annual rate targeted by policymakers. In fact, we think inflation has the potential to fall even lower when you look at housing costs like rent, whose spikes and dips take a while to show up in metrics like the Consumer Price Index (CPI). That’s not the same thing as saying prices are falling (deflation, in other words), but they’ve stopped increasing as quickly as they were before. Lower inflation, as a result, could lead to flat or even falling interest rates in 2024, potentially taking our foot off the brake of the economy and supporting growth. With inflation dampened, monetary policymakers would be less compelled to push borrowing costs higher to curtail demand—a shift that would support a longer runway for economic expansion. Benign inflation and relatively less restrictive financial conditions could also benefit the stock market in the near term, with expectations for continued consumer spending—and higher corporate earnings—fueling stock prices. Back in October 2023, for example, inflation came in surprisingly flat, leading one index made up of smaller companies to jump 5% in a single day. And for now, with interest rates at historically-high levels, bonds also offer opportunities for investors. Reasons for caution Yet the economy and markets still face risks in 2024. Something as large and unwieldy as the economy, and major actions like the Fed’s many rate hikes, can take years to be felt. For example: A recent study by the Federal Reserve Bank of San Francisco based on a range of global economies estimates that, four years after an unexpected 1% increase in a country’s policy interest rate, real GDP would be on average about 2% lower than it would otherwise be and 5% lower after 12 years. Because of this, it could very well be sometime in 2024 when economic activity starts to buckle under the weight of rate hikes that began in March 2022. Now we’re getting a little wonkier: The ongoing threat of a recession would weigh on market returns, but if inflation remains at current levels at the time it occurs and the government still runs a large deficit, monetary and fiscal stimulus in response to a downturn may not be at a scale hoped for by investors. In the event consumers pull back on their spending, expectations for corporate earnings that have supported the performance of the stock market (see Figure 3) would also suffer. The pricing power companies have recently enjoyed amidst the inflationary environment would likely erode, hitting their bottom lines as well, and potentially driving down stocks. So what now? The best plan of action during uncertain times is often no action at all. The risks associated with a down cycle exist alongside the opportunity of a growth cycle. Look no further than the last three years. The current elevated yields in bonds markets also offer opportunities for investors. If you find yourself sitting on too much cash, now might be the time to act and put it to work in the market. You can invest it as a lump sum, which research shows may offer higher potential returns over time. Or you can sprinkle it into a portfolio over time. (We make it easy to invest funds from your Cash Reserve account, either way.) And however the market performs in 2024, you should remain confident that investing can help you reach your financial goals in the long-term.

Why it’s not your time to time the market History shows that timing the market is a fool's errand. Instead, here are two investing approaches to help build wealth over time. The main idea: Timing the market can be risky and takes a lot of effort and skill (or luck!) to be successful. History is not on the side of timing the market. Study after study after study after study—you get the point—has shown the risks of timing the market and how a more general buy-and-hold strategy can help investors increase their portfolio performance. The risks of timing the market include: Poor timing and investing when asset prices are at a higher point. Missing high-performing periods, even single days or months, when the market increases. Timing the market also takes a lot of work: Successful market timing usually requires analysis and forecasting techniques that can be quite advanced. Market timing also requires a dedication of time as you need to be constantly tracking and analyzing the market. Instead, consider these two approaches. Both can work well if you have long-term investing goals. Lump-sum investing is depositing the entire balance of cash at once. This method works well if you have extra cash and are looking to maximize the time your funds are invested. It lowers the likelihood that you miss out on any high-performing periods. Keep in mind that your entire lump sum is at risk if the market decreases. Dollar-cost averaging is depositing the same amount of money at fixed intervals (weekly, monthly, etc) over a period of time. This approach works well if you want to take less risk with a lump sum of cash and protect against short-term market declines, or if you only have money to save after each paycheck. Either way, both options are less risky than timing the market and less work for you to manage.