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How To Handle Volatility in Stocks
It goes without saying that stocks have been pretty volatile around the world recently. But even if you view stock market volatility as a normal occurrence, it can be tough to handle when it’s your money at stake. While there is no foolproof way to handle the ups and downs of the stock market, the following commonsense 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 often perform differently under different market conditions, spreading your assets across a variety of different investments such as stocks, bonds, and cash alternatives (e.g., money market funds and other short-term instruments), has the potential to help manage your overall risk. Ideally, a decline in one type of asset will be balanced out by a gain in another, though diversification can’t guarantee a profit or eliminate the possibility of market loss.
Focus on the forest, not on the trees
As the markets go 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. To help illustrate this point, take a look at this chart of the returns of the S&P 500 between 1/1/98 to 12/29/17. You’ll notice that missing only a few of the best days had a tremendous impact on the overall performance of the index.
Look before you leap
When the market goes down and investment losses pile up, you may be tempted to pull out of stocks altogether and look for less volatile investments. Remember that urge is normal. As a human being, that reaction is your primal survival instincts kicking in. The issue with following this temptation is the small projected returns that typically accompany low-risk investments. You have to ask yourself, will these safer investments produce enough to accomplish your goals? 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, time horizon and overall investment policy statement.
Don’t count your chickens before they hatch
As the market recovers from a down cycle, elation quickly sets in. If the upswing lasts long enough, it’s easy to believe that investing in the stock market is a sure thing. But, of course, it never is. As many investors have learned the hard way, becoming overly optimistic about investing during the good times can be as detrimental as worrying too much during the bad times. The right approach during all kinds of markets is to be realistic. Have a plan, stick with it, and strike a comfortable balance between risk and return.
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