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Volatility in the market is unpleasant but inevitable. Investors can prepare for it.
Keep the noise level low, and your financial plan will hum smoothly with these tips: Invest only with money you already own, not a dime beyond.
Stay Focused on Your Long-Term Investment Strategy
Swings in the market are to be expected. A long-term financial plan can help you think through the volatility and keep your eye on the long term. Consider diversifying your portfolio as well because a loss in one bucket won’t have an outsized effect on another bucket. Do your research first before committing capital, and consider the fundamentals of a business – its business model, competitive positioning, and regulatory environment. Remember, your financial goal may be years or even decades away from being realised, so do not take any knee-jerk actions that could derail its realisation. Understanding the features of volatility’s source also helps you be better prepared for the ups and downs of the market – reassessing risk tolerance, rebalancing your portfolio, and holding strong to your plan as the market gets choppy and volatile are just some of the ways of staying the course.
Diversify Your Portfolio
Market volatility presents an investor with an opportunity to get better quality stock at lower prices. This could mean improving the quality of a portfolio while also having the potential to decrease the risk (number of negatively-performing stocks) associated with a portfolio, or even a single investment. Beyond getting out of cash and into a properly diversified portfolio with different asset classes (such as stocks and bonds), sizes (large-cap, mid-cap and small-cap) and styles (such as growth and value), investors might want to consider adding stocks of different economic sectors. Finally, taking risk to a new level, add fixed-income investments such as bonds. While they typically generate measly annual returns compared with stocks, buying these fixed-income securities can lower your portfolio’s risk while producing steady streams of income over time. Investment diversification has its own costs as funds and ETFs each carry a fees. The mutual funds of funds usually have higher fees than individual ones, so investment professionals are invaluable as a resource for choosing the best combination of assets for your personal investment goals, time frames, financial situation and tolerance to risk.
Don’t Panic
Market volatility is par for the course in investing so, regardless of your comfort or familiarity level, stay current and have all the facts at your fingertips. There are many reasons for volatility in the stock market: some are beyond the control of an investor, such as geopolitical tensions and wars, or corporate scandals like Enron. Just keep those long-term objectives firmly in view and concentrate on those things well within your control, such as which media you pay attention to, whom you hire to manage your money and how you organise it, using free software programs designed for the purpose (and that are also a defence against fraud). Keeping your psychological equilibrium and maintaining an open-minded view in your approach to the market will be a large part of riding those waves. Maintaining your focus and calm are important steps towards managing successfully through periods of market upheaval.
Keep an Eye on Your Investments
Just be sure to keep an eye on your portfolio, but avoid doing so to excess. Reviewing investment returns daily, weekly or monthly, particularly if the investment environment is volatile, could become habit-forming and nerve-racking to where you start making poor decisions that ultimately undermine your interests. Checking in with your advisor to ensure that your portfolio is performing well, and you are still on track to meet your goals, could also help if you experience an economic downturn. Market volatility can be difficult; imagine jumping out of a plane with a parachute in perfect working order. When you pull the string to open it, that delay before you hit the ground is a bear-market, that’s volatility. You may feel illegal, but hang on to your strategy. The sharp market seesawing experienced throughout 2015 is a potential hot spot for those clients nearing retirement. It could be a good time for you to check in with clients to review their entire financial plan – discussing risk-taking, especially – and reminding them that the market’s downturn is nothing new. Your adviser could discuss whether a client’s investment strategy is in line with their risk tolerance and ability, as well as a good time to rebalance a portfolio and return it to target mixes.
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