How to Prepare for What’s Next?
The third quarter of 2024 witnessed notable stock market volatility. While some consider it just a temporary blip, others believe it could signal an inflection point. Whether it’s the pessimistic bears warning of an artificial intelligence (AI) bubble or the optimistic bulls asserting the market’s natural recovery, only time will reveal who’s right.
Regardless of the outcome, this recent stock market turbulence offers three critical lessons for investors. These insights can help you stay prepared for the future.
Lesson 1
Market Fluctuations Are Inevitable
The stock market’s volatility is nothing new. As the legendary J.P. Morgan once reportedly quipped, “The market is going to fluctuate.” While we can’t predict the future, this sentiment reminds us of the inherent unpredictability of equities.
In 2023, the Morningstar US Market Index surged 26%, fueled by excitement around AI advancements like ChatGPT. Major players such as Nvidia (NVDA), Microsoft (MSFT), and Meta Platforms (META) soared on the back of this optimism. However, by the third quarter of 2024, market enthusiasm cooled as concerns over high valuations and macroeconomic risks emerged.
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The lesson here is clear: investors should not be lulled into complacency by periods of rapid gains. Markets move in cycles, and while volatility isn’t equivalent to risk, it can lead to emotional decision-making that may impair long-term capital growth.
Lesson 2
Diversification Remains Essential
Diversification is far from obsolete. The third quarter of 2024 proved that having a balanced portfolio can protect against unexpected downturns. While equities struggled, the Morningstar US Core Bond Index saw gains, and multi-asset portfolios benefitted from this diversification.
For instance, the traditional 60/40 portfolio—60% stocks, 40% bonds—performed significantly better than an all-equity portfolio during the third-quarter selloff. Bonds, once deemed irrelevant by some, returned to the spotlight, providing much-needed stability for investors amid stock market volatility.
Lesson 3
Change Is the Only Constant in Markets
Markets evolve, and leadership within them rotates. For much of the past decade, growth stocks, large caps, and US equities dominated. But the third quarter of 2024 saw small caps, value stocks, and non-US equities outperform.
This shift in market leadership reminds us of the fluid nature of investments. Looking back at previous market cycles, we’ve seen similar patterns of rotation. For example, after the 2000 dot-com bubble burst, value stocks outperformed for years. And while AI-powered growth stocks thrived in the early 2020s, recent trends suggest that the next phase of market leadership could come from different sectors.
Don’t Predict, Prepare
So, how can investors navigate uncertain markets? Rather than attempting to predict short-term movements, a diversified portfolio that includes a broad range of assets is the best way to stay prepared. The future rarely mirrors the past, but by embracing flexibility and diversification, investors can weather various market conditions.
Data Source and Image Credits: morningstar