Chris Parks, Financial Advisor
Handling 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 it's your money at stake.
Here are some tips to help handle market volatility.
Don't put all your eggs in one basket
Diversifying your investment portfolio is the best way you can handle market volatility. Because asset classes perform differently under different market conditions, spreading your assets across different investments such as stocks, bonds, and cash alternatives can help manage your overall risk. Ideally, a decline in one type of asset will be balanced by a gain in another, though diversification can't guarantee a profit or eliminate the possibility of market loss.
Focus on the forest, not the trees
As the markets go up and down, it's easy to become too focused on day-to-day returns. Instead, focus on your long-term investing goals. Only you can decide how much risk you can handle, but don't overestimate the effect of short-term price fluctuations on your portfolio.
Look before you leap
When the market goes down, you may be tempted to pull out altogether. The small returns that typically accompany low-risk investments may seem 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 portfolio into conservative investments may be the right strategy for you if your investment goals are short-term. But if you still have years to invest, stocks have historically outperformed stable value investments over time.
Look for the silver lining
A down market does have a silver lining; 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. Here, you don't try to "time the market" by buying shares when the price is lowest. Instead, you invest the same amount of money at regular intervals. When the price is higher, you’ll buy fewer shares of stock, but when the price is lower, you will buy more shares. Over time a regular fixed dollar investment may result in an average price per share that's lower than the average market price.
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 up on 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. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance, or redesign it so that it better suits your current needs. Don't hesitate to get expert help if you need it when deciding which investment options are right for you.