Iinvestors can’t get enough of stocks.
Stocks represent 24% of total household assets at the end of September, according to a recent research note from Wells Fargo. That’s an increase from just 13% a decade ago, and above the last major peak in stocks in the first quarter of 2000.
The boom in stocks in portfolios may be a harbinger, according to Wells Fargo stock analysts.
“The high allocation to equities is indicative of what happened, and in the past good things tended not to happen from high levels,” the researchers wrote. They then write that they believe any sharp pullbacks in stocks over the next few months could have a pronounced impact on what’s known as the “wealth effect” – or the inclination of consumers to keep spending money. money or not.
When the share value increases, investors feel richer and therefore more likely to go out and spend the money, perhaps on expensive holiday gifts or travel. But the reverse is also true: a significant drop in the value of stocks could cause consumers to slow down or stop spending, hurting the overall economy.
Humans are very emotional and are primarily motivated by fear and greed, says Sam Stovall, chief investment strategist at investment research firm CFRA Research.
“Thus, the higher the percentage of retirement assets in equities, the greater the volatility associated with fluctuations in stock prices,” he adds.
We have seen in the past how investors react when the market is particularly volatile, and sometimes the results are not good.
When the market collapsed in March 2020 when COVID-19 hit the United States, investors withdrew $ 326 billion from mutual funds and exchange-traded funds – more than triple the cash outflows seen during of the previous monthly record, October 2008, according to The morning star. (If investors had held their ground instead, they could have doubled their money by August 2021.)
Meanwhile, tons of new investors piled up in the market during the pandemic, when everyone was stuck at home without having the opportunity to do some of their favorite hobbies, thanks in part to trading apps like Robin Hood, which allow investors to buy and sell stocks in seconds. A recent to study by Charles Schwab found that 15% of U.S. stock investors started in 2020.
The importance of a balanced investment portfolio
Not everyone trades individual stocks. Back in 2016, Bench search found that only 14% of American families are directly invested in individual stocks, but a majority (52%) have investments in the market, mainly through retirement accounts like 401 (k) s, which are dominated by mutual fund.
Always keep in mind that it is important to have a balanced portfolio, including funds that cover a wide range of stocks of large and small companies, national and international companies and those in various sectors, such as the technology, real estate and health care. You can consult the history of Money previous story on the diversification of your equity portfolio. And depending on your financial situation, age and tolerance for risk, you will probably want to include other assets in your portfolio, like bonds.
You also want to make sure that you regularly check your portfolio and rebalance it so that it continues to be aligned with your investment goals. Rebalancing is about selling investments that have increased in value and replenishing investments that have fallen in value so that your portfolio retains its target weightings so that your portfolio is not too concentrated in a single basket, like large tech stocks.
More money :
© Copyright 2021 Advertising Practitioners, LLC. All rights reserved.
This article originally appeared on Money.com and may contain affiliate links for which Money receives compensation. The opinions expressed in this article are those of the author alone, not those of any third party, and have not been reviewed, endorsed or endorsed in any way. Offers may be subject to change without notice. For more information read Money disclaimer.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.