Market volatility can cause great anxiety. By setting financial goals and adhering to an investment strategy, however, investors can help manage through these times more successfully.
Market turbulence is an inevitable part of long-term investing, and investors who remain committed to their plans even during periods of volatility often reap substantial returns as their patience pays off.
1. Invest with a long-term horizon
Maintaining an explicit financial goal with an associated timeline can help keep you on track during volatile markets. Investors with longer time frames tend to make more aggressive investments as they can weather periods of volatility in order to reap their rewards more swiftly.
Most investors tend to invest over three to ten years, typically when saving for college education costs, purchasing their first home, or retirement savings. This type of investing usually entails creating a balanced portfolio containing higher risk investments (like stocks) with lower risk assets ( such as bonds).
Long-term investors may find they can better weather market fluctuations as their principal will eventually be replenished from savings or other sources of income. This allows them to avoid selling during volatile times as they rethink their long-term strategy; instead, regular investing allows them to take advantage of dollar cost averaging.
2. Keep your emotions in check
Market volatility can quickly ramp up emotions and make it hard to stay calm; but remembering that panicked reactions could lead to hasty decisions is vital in making smart investments decisions.
Let’s say you wake up one day to find that your portfolio has increased by 7%. After checking it, smiling and humming a tune, it suddenly drops by 11% overnight! Between this exhilaration of watching it grow and panic that ensues when realizing its decline can come unexpectedly quickly – both are enough to cause costly mistakes, like selling at lower than market value or buying too early or too often.
As you combat impulsiveness in investing decisions, the best strategy is to distance your emotions from them and remember that even if your portfolio’s value takes a dive, there may be enough assets elsewhere (cash and bonds) that you have available to weather any storm. Furthermore, periods of high volatility tend to occur frequently, and big gains often follow such losses.
3. Keep your cash accessible
Youngdahl asserts that keeping a certain portion of cash in savings accounts is one effective way to combat the temptation to sell stocks during market dips. Furthermore, diversifying your investments and not placing too much weight in any one asset could help safeguard against devaluations that could negatively impact your portfolio when that asset depreciates significantly.
However, while moving your savings to cash may give you peace of mind, doing so locks in losses from paper to real. Furthermore, this move could cost you the opportunity of reinvesting at lower prices; an opportunity cost may apply here.
Predicting when and how to enter or exit the stock market can be both time consuming and counterproductive, since trying to beat it is impossible and could cost you when it rises again. A more practical strategy would be dollar cost averaging, in which you invest a consistent dollar amount at regular intervals which enables you to buy more shares when the market dips while simultaneously purchasing less when its high, providing an effective method for riding out market fluctuations.
4. Don’t sell at the first sign of trouble
Market volatility can be unnerving, leading to investors to question their investments. However, it’s essential to remember that market fluctuations are part of investing and it is crucial that one remains invested throughout this experience.
Reacting instinctively may result in costly errors; selling at the first sign of trouble could mean forgoing any potential gains in recovery. Investors should instead work toward aligning their portfolios with long-term goals and risk tolerance to ensure the optimal results are realized.
Financial advisors recommend that investors diversify their portfolios to reduce exposure to any one sector or security, which is especially crucial during volatile times when certain industries and even individual companies may take more of a beating than the overall market, according to Schmehil. Furthermore, searching out FDIC-insured savings accounts offering competitive annual percentage yields as part of an emergency fund strategy could help ease stress during downturns and ensure you’re not overexposed to market volatility.