When the markets start dropping, daily doses of bad news may make you feel there is no end in sight. Market volatility can cause anxiety, fuel uncertainty and trigger hasty decisions in even the most experienced investor.
But panicking is not a strategy. It’s important to keep perspective when markets get choppy. Here are five strategies to consider when volatility strikes.
Stick to your plan.
If you really want to improve your chances of reaching specific financial goals, put those goals in writing. (Lean on a financial advisor for guidance if necessary.) Whether your goals include planning for retirement, paying for college or starting a business, you should precisely define costs, time frame and priority for each. Having a clearly defined time frame, for example, helps you narrow down your investment options. The more well-defined your plan is—and the better you understand its components—the less likely you are to panic when things go south.
Manage your investment risk
Your ability to take on investment risk should be carefully determined. The right amount of risk can give you the confidence you need to stick to the plan you set up. Your advisor likely used some form of questionnaire to start the process of determining your risk tolerance. Or you can easily find one online if you wish to jump in on your own. This step should not be taken lightly.
Stay invested
Do not let your emotions drive your investment decisions! Although short-term volatility swings can be difficult to stomach, it’s important for long-term investors to stay the course. While it may be tempting to pull out of the stock market, investors may miss out on a potential market rebound and opportunity for gains while they are on the sidelines. Invest regularly to take advantage of dollar-cost averaging.
Stay diversified
Nobody knows which sector will outperform next year. By investing in a mix of mutual funds or ETFs that invest in stocks, bonds and cash-equivalents, you could lower your risk because you’re not overexposed to any one type of investment. You can further diversify by investing in subcategories of these: within stocks, for example, you can choose among growth, value, income, global, etc., depending on your investment objectives.
Diversification doesn’t guarantee a profit, but over time it can help reduce the effects of volatility.
Talk to your advisor.
I saved this one for last, although this really should be the first step for many. If you already use the services of a financial professional, they should be aware of your goals and your unique risk tolerance. They are trained to help you implement a plan based on your own objectives, and they should be monitoring your progress. You may wish to talk to them before making a drastic move with your investment. If you don’t have an advisor yet, feel free to contact us for a complimentary consultation.
Investing always entails some risk. Market volatility is a reality of investing. The five strategies outlined above should help you deal with some of the uncertainty in your investment portfolio. If you have specific concerns that were not addressed, you can contact our firm here www.fpc.money.
Wayne Arnold, ChFC®, RICP®
Managing Partner
Financial Planning Center, LLP