The stock market is an unpredictable beast.  No one can foretell precisely what will happen to stocks in the short-term.  The pendulum tends to overshoot both on the upside as well as on the downside.  But in the long-term, stock performance tends to move towards its historical mean, that is, about a 10% annual return.

The last few months have been brutal to stock investors.  In the fourth quarter of last year stocks lost more than a third of their value.  To add insult to injury, the S&P 500 lost an additional 11.7% in this year’s first quarter.  This despicable performance will set its mark in history as the worst period for stocks since the great depression.  Not only were the last six months the worst since 1933, the entire decade has had its worst performance in over 70 years.

But soon enough, the pendulum turns the other way in order to achieve the historical balance.  And just as the pain was becoming unbearable for many investor and they started swearing off stocks forever, things indeed started to turn around.  The last four weeks were the best winning streak for stock since 1933.  As of the end of last week the Dow had risen 1,471 point, or 22.5% since its March 9 bear market low.

There is still a long way to go before we recoup the losses experienced in the last few months.  And there is no guarantee that we won’t test another new bear market low.  But there is also a good chance that this could be the beginning of the turn-around that many investors have been longing for. 

The trouble is, no one can tell for sure which one it is – another sucker’s rally, or the beginning of the next bull run.  Just be ready for volatility no matter what the overall direction of the market may be.  It would be great if you could time the market perfectly but it has been proven again and again that timing the market is a futile exercise.  Just think – if you had decided to pull all your money out about a month ago when things looked desperately ugly, you would have missed a tremendous boost to your investment in the last 4 weeks.  

The best thing you can do is to not make any drastic changes to your investment portfolio.  Make small adjustments over time to rebalance your asset allocation to better align with your risk tolerance if necessary.  Many investors now know that their true risk tolerance is much lower than they realized, and that is ok.  But instead of pulling out completely make small adjustment over a period of several months until you are comfortable with your asset mix again.

It is been said many times before that the stock market is a long-term investment.  If you keep that in perspective and forget about the short-term ups and downs you will be ok.  With the worst decade in the last 70 year just behind us, chances are that the next decade will have strong positive results.  But since there are no guarantees, keep your portfolio diversified across many different assets classes so that your can benefit from an upturn but at the same time have some cushion in case of a continued downturn.