Keeping your cool can be difficult when the market goes on one of its periodic roller-coaster rides. Having strategies in place can prepare you, both financially and psychologically, to handle market volatility. Here are 11 ways to avoid making hasty decisions, which could have a long-term impact on your financial goals.
- Have a game plan
Establishing predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach—combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You can also use diversification to try to offset the risks of certain holdings with those of others. Diversification can help you understand and balance risk in advance. If you are an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might predetermine you will take profits when a security or index rises by a certain percentage and buy when it falls by a set percentage.
- Know what you own and why you own it
When the market goes off the tracks, knowing why you made a specific investment can help you evaluate whether your original reasons still hold—regardless of what the overall market is doing. Understanding how a specific holding fits in your portfolio can help you consider whether a lower price might actually represent a buying opportunity.
On the contrary, if you do not understand why a security is in your portfolio, find out. That knowledge can be particularly important when the market goes south, especially if you are considering replacing your current holding with another investment.
- Remember – everything is relative
Generally, variety in the returns of different portfolios can be attributed to their asset allocations. If your portfolio is well-diversified with multiple asset classes, it could be useful to compare its overall performance to relevant benchmarks. If you realize your investments are performing in line with those benchmarks, you feel better about your overall strategy.
Even a diversified portfolio is no guarantee you will entirely avoid losses, of course. However, diversification means just because the S&P 500 might have dropped 10% or 20%, your overall portfolio may not be down by the same amount.
- Tell yourself this too shall pass
The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you are considering changes, a volatile market can be an inopportune time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of good investment planning.
- Be willing to learn from your mistakes
Anyone can look good during bull markets—but smart investors are produced by the inevitable rough patches. Even the best investors are not right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions. An expert can help prepare you and your portfolio to both weather and take advantage of the market’s ups and downs.
- Consider playing defense
During volatile periods in the stock market, many investors re-examine their allocation to such defensive sectors as consumer staples or utilities, although like all stocks, those sectors involve their own risks. Dividends also can help cushion the impact of price swings.
- Stay on course by continuing to save
Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings. If losses are even partially offset by new savings, your bottom-line number may be less discouraging.
If you are using dollar-cost averaging — investing a specific amount regularly regardless of fluctuating price levels — you may be getting a bargain by buying when prices are down. Also, consider your ability to continue purchases through market slumps. Systematic investing does not work if you stop when prices are down.
- Use cash to help manage your mindset
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you established an appropriate asset allocation, you should have resources on hand to avoid selling stocks to meet ordinary expenses or, if you have used leverage, a margin call. Having a cash cushion coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing you are positioned to take advantage of a downturn by picking up bargains may increase your patience.
- Remember your road map
Solid asset allocation is the basis of sound investing. One reason a diversified portfolio is important is strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Timing the market can be challenging under the best of circumstances. Wildly volatile markets can magnify the impact of a wrong decision just as the market is about to move in an unexpected direction, either up or down. Make sure your asset allocation is appropriate before making drastic changes.
- Look in the rear-view mirror
If you are investing long-term, sometimes it helps to look back and see how far you have come. If your portfolio is down this year, it can be easy to forget the progress you may have already made over past years. Although past performance is no guarantee of future returns, of course, the stock market’s long-term direction has historically been up. With stocks, it is important to remember having an investing strategy is only half the battle—the other half is sticking to it. Even if you are able to avoid losses by being out of the market, will you know when to get back in? If patience has helped you build a nest egg, it just might be useful now, too.
- Take it easy
If you feel the need to make changes to your portfolio, there are ways to do so without a total overhaul. Consider testing the waters by redirecting a small percentage of one asset class to another. You could put any new money into investments you feel are well-positioned for the future, but leave the rest as is. You could set a stop-loss order to prevent an investment from falling below a certain level or set an informal threshold below which you will not allow an investment to fall before selling. Even if you need or want to adjust your portfolio during a period of turmoil, those changes can — and probably should — happen in gradual steps. Taking gradual steps is one way to spread your risk over time, as well as over a variety of asset classes. If you have questions about your portfolio or market volatility, schedule an appointment to meet with an Arvest Wealth Management Client Advisor. Our experienced professionals can evaluate your unique circumstances to help ensure your portfolio supports your long-term goals.
Words to ponder
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”
— Warren Buffett
“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed.”
— Benjamin Graham
“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”
— Peter Lynch
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