It’s standard for the financial markets to go on periodic roller-coaster rides, but that doesn’t mean that dealing with the ups-and-downs of market volatility is easy or stress-free. There is always an element of risk in investing, but having a level of understanding about financial trends and a toolbox of ways to keep your cool will help you ride out the swings and keep moving toward your goals.
What Does Market Volatility Look Like?
Market volatility refers to swings in the financial markets. These changes can be caused by a range of situations, such as a pandemic, political uncertainty, an overvalued sector or trade wars. Essentially, anything that causes investors to question the financial future can cause periods of volatility.
How to Invest in a Volatile MarketThere is no way to avoid a volatile market; the best thing any investor can do is have a variety of strategies to help protect their future.
1. Have a Plan
The first and most essential thing for any investor to do is to have a plan. Work with a financial advisor to determine your risk tolerance – how comfortable you are with risky investments based on your goals, timeline and preference. Once you know your risk tolerance, you can build a diversified portfolio that takes you closer to your goals while hedging against unforeseen changes in the market.
2. Stay Consistent
Once you’ve made your plan, the key to withstanding market volatility is to stick to that plan. Changing your investment strategy as a reaction to the market essentially goes against all the work you did when you created a strategic plan. Unless your goals, timeline or risk tolerance has changed, stick to the course you’ve mapped out.
3. Don’t Try to Time the Market
The worst thing any investor can do in a volatile market is to realize their losses by leaving the market. There hasn’t been a dip yet that the market hasn’t recovered from. However, if you pull your investments out and try to jump back into the markets when they start to improve, you’re likely to miss out on an important part of the upswing.
4. Apply Defensive Investment Strategies
Defensive investment strategies are conservative ways of managing your portfolio to try to minimize the risk of losing your principal investment. The primary purpose of these strategies is protection, not growth. Some defensive investment strategies include high-quality short-term bonds and blue-chip stocks.
5. Keep Adjustments Small
When you do feel you need to make an adjustment to your portfolio during a period of market volatility, keep it minor and ensure that your portfolio stays diversified across asset classes. You don’t want to move everything from one asset class to another just to watch your chosen investments drop after another market shift.
6. Continue to Invest
Investing regularly acts as an anchor to help you maintain the status quo throughout market upheaval. When you contribute small, regular amounts on a standard basis (such as bi-weekly or monthly), you’re smoothing out the highs and lows over time.
How to Stay Sane During Market Volatility
You can take all kinds of precautions and still feel stressed when the markets go through periods of volatility. However, emotions and the stock market don’t mix; avoid emotional investing and try these strategies to keep your cool.
1. Keep Cash on Hand
You should always have some money accessible outside the stock market. Keeping cash in a volatile market means that you don’t need to pull out during a downswing – thus realizing your losses – because you have enough liquid assets to cover your living expenses. You can ride out the swings with less stress.
2. Review Your Portfolio
If you start feeling worried about the way your portfolio is performing, review your investments to ensure that they still align with your goals. If you worked with a financial advisor, your portfolio was put together very deliberately and reviewing it could give you peace of mind. If you didn’t build your portfolio with the help of a financial advisor, consider making an appointment to review it together.
3. Compare Against Relevant Benchmarks
Comparing your returns against previous years – and different scenarios – can be stressful and doesn’t really tell you anything about your portfolio’s performance. Be sure to look at similar portfolios as you determine if your investment choices need to be changed.
4. Remember that Markets Are Cyclical
As you watch the ups and downs, remember that bear markets come and go. The markets have historically always bounced back and continued their uphill trends. So while it may be painful to look at your accounts now, keep in mind that things will likely come back around.