What am I going to do about market volatility?
Formula Rossa is a rollercoaster that accelerates from 0 to 100 km (62 miles) in 2 seconds, climbs 52m (171 feet), and generates 1.7Gs while stretching to an astonishing top speed of 149.1 mph (240 kmh). Riders are given goggles for protection.
In a more youthful time, many of us liked to ride a roller coaster, but these days, we prefer holding on for dear life at an amusement park... not when we turn on our tablet in the morning and read the Business Section. Yes, we are in a volatile time... markets going up as fast as they are going down. If you watched my desktop stock ticker quote screen burst RED and GREEN, it may bring back uneasy feelings of 2007 & 2008.
Market volatility is certainly the name of the game right now, just look at the Dow Jones. So, what should you do, and perhaps more importantly, what should you not do?
Here are 4 pointers to help un-clench your fingers and tolerate the ride.
1. DON’T bail out at the first signs of a declining market. Take advantage of your resources.
Being on the sidelines has its costs. Obviously, there is no delight in watching an investment drop in value. Yet selling it often just locks in the loss. You might curtail potential profits and dividends by not participating in any future gains. That is always the possibility during a few strong, but unpredictable, trading days. The most effective sell discipline is executed on analysis of many relevant investment and personal facts. If you want to benefit from those RED days, long term commitment is the key.
2. Diversify. Yes, Diversify.
Bonds, stocks, and short-term investments usually react differently to disparate market conditions. When you spread (diversify) your investments across these three asset classes, you will:
- Help manage the risk level of your portfolio
- Counterbalance the effects of one poorly performing asset with better performance of another
It is important to understand that diversification does not guarantee against a loss.
There are assets beyond these worth noting. For some, your home may be an investment. I wish we could count cars amongst our assets too, but unless you are a car collector like Jay Leno, I don’t consider your auto an investment- it’s a tool.
3. Have A Plan.
As part of your investment strategy, you should have midterm and long-term plans. Sometimes, my clients find it helpful when I create different “buckets” of investments earmarked for different goals. It is essential to understand that volatility will come and go. Be prepared by moving to cash only when you might need to access the money within a year. If you can, try not to react on a merely emotional level. Stick to your plan and use other activities to relax your mind. If your plan targets a specific asset allocation, be flexible if market volatility prompts you to realign your portfolio sooner than expected.
4. Don’t attempt managing the volatility on your own.
As a financial adviser, I can help you look past the volatility and guide you toward your financial goals, investment time horizon, and tolerance for risk. A well trained and experienced professional can communicate and remind you why you invest. Simplify the task, don’t go it alone.
The Bottom Line
Consistently, an age appropriate, well designed plan will provide sustainable long-term results. It is risky to attempt timing the market with short term moves. Instead, let's spend time developing and implementing a strategy/plan, way before any sense of panic occurs.
With a trusted partner, we have a greater chance of avoiding intense emotional reactions to short term market volatility.
Together, we can enjoy the ride!