How to Handle Market Volatility
Conventional wisdom says that what goes up must come down. But even if you view market volatility as a normal occurrence, it can be tough to handle when your money is at stake.
Though there's no foolproof way to handle the ups and downs of the stock market, the following common-sense tips can help.
Don't put your eggs all in one basket
Diversifying your investment portfolio is one of the key tools for trying to manage market volatility.
Because asset classes often perform differently under different market conditions, spreading your assets across a variety of investments such as stocks, bonds, and cash alternatives has the potential to help reduce your overall risk.
Focus on the forest, not the trees
As the market goes up and down, it's easy to become too focused on day-to-day returns. Instead, keep your eyes on your long-term investing goals and your overall portfolio.
Look before you leap
When the market goes down and investment losses pile up, you may be tempted to pull out of the stock market altogether and look for less volatile investments.
But before you leap into a different investment strategy, make sure you're doing it for the right reasons. How you choose to invest your money should be consistent with your goals and time horizon.
Look for the silver lining
A down market, like every cloud, has a silver lining. The silver lining of a down market is the opportunity to buy shares of stock at lower prices. One of the ways you can do this is by using dollar-cost averaging.
With dollar-cost averaging, you don't try to "time the market" by buying shares at the moment when the price is lowest.
Making dollar-cost averaging work for you
Get started as soon as possible. The longer you have to ride out the ups and downs of the market, the more opportunity you have to build a sizable investment account over time.
Stick with it
Dollar-cost averaging is a long-term investment strategy. Make sure you have the financial resources and the discipline to invest continuously through all types of market conditions, regardless of price fluctuations.
Don't stick your head in the sand
While focusing too much on short-term gains or losses is unwise, so is ignoring your investments. You should check your portfolio at least once a year--more frequently if the market is particularly volatile or when there have been significant changes in your life.
For those closing in on retirement who have not looked at their allocations recently may well want to use the current volatility as a wake-up call to lighten up on stocks, despite the frequent admonition to do nothing when stocks are down. Younger investors should stay the course.
Don't count your chickens before they hatch
As the market recovers from a down cycle, elation quickly sets in. If the upswing lasts long enough, it's easy to believe that investing in the stock market is a sure thing.
The right approach during all kinds of markets is to be realistic. As we move into a higher interest period, you can expect to continue to see more market volatility.
Another certainty is that my clients and I have worked to construct portfolios that can weather unexpected market events and participate in long-term economic growth consistent with their sensitivity to risk.
Such portfolios are built to adjust and adapt to changing markets so that they don't have to worry about how to respond to unexpected events or uncertain outlooks.
Have a plan, stick with it, and strike a comfortable balance between risk and return.
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