(Bloomberg) — The the return of FOMO is fueling concern that the market could fall.

Strong earnings and an overall downward trend in inflation have helped fuel a rally in the S&P 500 that few would want to miss. But with the index's 30% gain over the past 52 weeks stemming from just a handful of stocks like artificial intelligence play Nvidia Corp., some market watchers fear there could be a the unfolding melts.

Below, market veterans and financial advisors offer advice on how to navigate volatile markets and build a portfolio you can stick with. Downfalls, inevitably, happen. But thinking about the potential impact of a fall can help protect against rash moves. So here's what you should keep in mind.

Markets tend to recover quickly

To keep market declines in perspective, Sam Sovall, chief investment strategist of CFRA Research, suggests using stock market history as a “virtual Valium.”

“What amazes me is how long people think it takes to bounce back to highs from a correction, or from a 10% to 20% drop,” Stovall said. “Most people would say years, but on average it takes about four months.”

The speed of market returns argues against trying to time the market. Also, with market timing you have to be right on both your exit and your return. People often talk themselves out of rebounding, fearing that a big move could just be the prelude to another slump, Stovall said. . There may be a handful of top performing days missing a big influence in long-term returns.

Falling is normal

Just as hitting new highs is normal for a well-performing stock market, so are lows.

“To be a disciplined investor, you have to accept upfront that even in good markets, it's not going to go on forever — markets go down,” said Rob Williams, managing director of financial planning at Charles Schwab. “The good news is that they are generally recovering and the general direction of the markets continues to be up.”

or Schwab analysis looked at intra-year stock market declines over the 20 years from 2002 to 2021. There was a 10% decline in 10 of the 20 years, half the time, and the average size of the pullback was 15%. In two more years, the decline was nearly 10%.

It sounds stressful, but the good news is that in most of those years, stocks went up and the average return was roughly 7%, according to Schwab.

Diversification is protection

The S&P 500 looks big, but most people don't have all their money in the index or the mega-cap tech stocks that influence its performance.

Whether you use a financial advisor or have exposure to the stock market through a target date fund (TDF) in a workplace 401(k) retirement plan, your holdings are likely more diversified than you might think .

“We continue to educate and remind clients that they are not simply invested in the S&P 500 (and mega-cap tech), where there is significant volatility, emotional trading and inherent risk, as evidenced by the decline of these stocks in 2022 ,” he said. Laura Mattia, founder of Atlas Fiduciary Financial. “While US large-cap stocks may make up a portion of our clients' investments, their overall portfolio is well-balanced across asset classes that are not bloated.”

Finding out how your TDF is invested can be reassuring if the market drops, and it's easy to find out just by Googling a fund, looking on your 401(k) plan's website, or searching for a fund in Morningstar.com.

Anyone nearing retirement in the Fidelity Freedom 2030 Target Date Fund ( FFFEX ), for example, had about 56% in stocks as of the end of 2023. But it wasn't just parked in the S&P 500. Stock exposure was spread across index funds across geographies and styles, including international, growth, value, large-cap and small-cap stocks.

Meanwhile, younger investors in the Fidelity Freedom 2055 fund (FDEEX) had 83% in the stock — again, spread across geographies, market capitalization and values ​​and growth styles. At least in theory, younger investors should welcome bearish pullbacks each time to buy more shares at lower prices. (If you're in a 401(k) and stay fully invested, your regular contributions will.)

Rebalancing reduces risk

If you or a financial advisor has set an asset allocation for your portfolio, such as classic 60/40 split between stocks and bonds, your portfolio may be out of whack given the market's rise. Your portfolio is designed to reflect your goals and the time horizons associated with those goals, so returning percentages in line keeps you on track.

Selling appreciated shares in a taxable account means paying capital gains taxes in the following year, but it locks in gains and reduces risk in a portfolio. You may be able to offset those benefits by doing some tax loss harvesting to realize losses.

Schwab's Williams suggests rebalancing once a year. “If you rebalance more often, you may be overreacting to market movements,” he said.

You can build a buffer

Many financial planners manage clients' money in different ways.” buckets” intended for different purposes and time horizons.

A bucket for short-term needs will be invested conservatively. For someone nearing retirement who will need to use savings for expenses, this bucket would be one to three years' worth of low-volatility bonds, such as Treasuries or short-duration high-quality bonds , said George Gagliardi of Coromandel Wealth Management.

There will be a medium-term bucket, perhaps to fund a child's college, and a long-term bucket for retirement money. If you have decades to retire, that bucket will be heavily in stocks so you can get their long-term growth and beat inflation. Since you have the short-term bucket to use for immediate needs, you don't have to touch that long-term money and can avoid selling stocks in a downturn.

To contact the author of this story:
Suzanne Woolley in New York at (email protected)