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 it’s your money 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 ways you can handle market volatility. Because asset classes typically perform differently under different market conditions, spreading your assets across a variety of different investments such as stocks, bonds, and cash equivalents (e.g., money market funds, CDs, and other short-term instruments), can help reduce your overall risk. Ideally, a decline in one type of asset will be balanced out by a gain in another, but diversification can’t eliminate the possibility of market loss.
One way to diversify your portfolio is through asset allocation. Asset allocation involves identifying the asset classes that are appropriate for you and allocating a certain percentage of your investment dollars to each class (e.g., 70 percent to stocks, 20 percent to bonds, 10 percent to cash equivalents). An easy way to decide on an appropriate mix of investments is to use a worksheet or an interactive tool that suggests a model or sample allocation based on your investment objectives, risk tolerance level, and investment time horizon.
Focus on the forest, not on 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. Although only you can decide how much investment risk you can handle, if you still have years to invest, don’t overestimate the effect of short-term price fluctuations on your 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. The small returns that typically accompany lowrisk investments may seem downright attractive when more risky investments are posting negative returns. 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.
For instance, putting a larger percentage of your investment dollars into vehicles that offer safety of principal and liquidity (the opportunity to easily access your funds) may be the right strategy for you if your investment goals are short-term (e.g., you’ll need the money soon to buy a house) or if you’re growing close to reaching a long-term goal such as retirement. But if you still have years to invest, keep in mind that stocks have historically outperformed stable value investments over time, although past performance is no guarantee of future results. If you move most or all of your investment dollars into conservative investments, you’ve not only locked in any losses you might have, but you’ve also sacrificed the potential for higher returns.
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 you have 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. In fact, you don’t worry about price at all. Instead, you invest money at regular intervals over time. When the price is higher, your investment dollars buy fewer shares of stock, but when the price is lower, the same dollar amount will buy you more shares. Although dollar cost averaging can’t guarantee you a profit or a loss, a regular fixed dollar investment may result in a lower average price per share over time, assuming you invest through all types of markets. Travis L. Dobbs, CFP, is the founder of ClearView Financial, which specializes in providing retirement and legacy planning. Mr. Dobbs is Blount County’s only Certified Financial Planner and a proud member of the Million Dollar Round Table. Investment Advisory Services and securities offered through ProEquities, Inc., a registered broker-dealer, and member of NASD & SIPC.
This information is educational in nature and is being provided with the understanding that it is not intended to be interpreted as specific legal or tax advice. Individuals are encouraged to consult with a professional in regards to legal, tax, and/or investment issues.