1. Game Plan
Sticking to a plan that recognizes the potential for turbulent times can assist in preventing emotion from dictating your decisions. For instance, you might take a core-and-satellite approach, which combines the use of buy-and-hold principles for the majority of your portfolio with tactical investing which is based on a more short-term market outlook. You could also implement diversification in order to attempt to offset the risks of certain holdings with those of others. Diversification will not guarantee a profit or guarantee against a loss. But it can help you understand and balance your risk. And if you're an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when a security or index rises by a set percentage, and buy when it has fallen by a set percentage.
2. Know what you own and why
When the market is volatile, knowing why you made your initial investment can help you gauge whether your belief still holds, regardless of what the overall market is doing. Understanding how a specific holding fits in your portfolio can also assist you in considering whether a lower price represents a buying opportunity. If you do not understand why a security is in your portfolio, research and find out. That knowledge can be very important when the market goes down, especially if you're considering replacing your current holding.
3. Keep in mind, everything is relative
The majority of variance in the returns of different portfolios can usually be attributed to the asset allocation. If you have a well-diversified portfolio which includes multiple different asset classes, it may be useful to compare the overall performance to relevant benchmarks. If in your research you find that your investments are performing on par with the given benchmarks, that realization may help you feel better about your investment strategy.A diversified portfolio is not a guarantee that you will never have losses. Although, diversification means that because the S&P 500 may have declined 10% or 20% does not mean the overall portfolio has declined that percentage.
4. This too shall pass
The financial markets are historically cyclical. You may wish you sold at that peak or bought at that bottom. But you could very well have another chance due to market behaviors. Even if you're considering changes, a volatile market can be an inopportune time to completely alter your portfolio. We believe a well-thought-out asset allocation is still the core of good investment planning.
5. Learn from previous mistakes
It is easy to look great during a bull market. But smart investors are produced by the inevitable rough patches in the market. No investor is correct all of the time. An expert can help you prepare both you and your portfolio to not only weather a storm but also take advantage of the ups and downs. Though there is no assurance that working with a financial professional will improve investment results.
6. Consider defense
During the volatile periods in the market, many investors will reexamine their allocation to those defensive sectors such as consumer staples or utilities (though like any stock these come with their own risks and are not necessarily immune to market fluctuations). Dividend stocks may also be an option to help cushion price swing impacts.
7. Stay the course and continue to save
Even if your portfolio value is fluctuating, regularly adding to your account for your long-term goals can help cushion the emotional impact market swings may have. Even if the losses are offset in part by new savings, your bottom-line may not be so discouraging.
When using dollar-cost averaging - investing a set amount regularly regardless of market fluctuations - you can find bargains when buying at lower prices. Keep in mind that dollar cost averaging will not guarantee a profit or protection from losses. You also need to consider your ability to continue these purchases during market slumps; this systematic approach to investing will not work if you stop because prices are down. Lastly, keep in mind that returns and principal values of your investments will fluctuate given market conditions and the shares can be worth more or less than your original purchase price when going to sell.
8. Using cash to manage your mind-set
Cash can be seen as a financial equivalent to you taking a deep breath to relax. It can aid in your ability to make thoughtful decisions as opposed to impulse decisions. If you have established an appropriate asset allocation, this should allow you to have the resources readily available to prevent having to sell your holdings to meet ordinary expenses or potentially for settling leverage used in a margin call. Giving yourself that cash cushion and having a disciplined investment strategy can change your view on market volatility. It will help you feel you are positioned to take advantage of downturns by getting bargains and can increase your ability to stay the course.
9. Remember your road map
A solid foundation is the basis of sound investing. One reason a diversified portfolio is so important is because strong performances from some investments can help to offset poor performance in another. Even with an appropriate asset allocation part of your portfolio could still struggle at any given time. Timing the market is a challenging task even for the most seasoned investors. Extremely volatile markets can magnify the impact of your decisions. Making a wrong decision just as the market is about to take off in either direction. Make sure your allocation is appropriate before making any drastic moves.
10. Look in the rear-view mirror
If investing for the long term, it can be beneficial to take a look back and see just how far you have come. If you are in the middle of a down year it can be easy to forget all the progress you have made in previous years. We must always remember that past performance is no guarantee of future performance. The stock markets long-term direction has historically been up. It is important to remember when talking about stocks, having an investment strategy is only half the battle; the other half is being able to stay consistent and stick to your plan. Even if sitting out of the market has aided in avoiding losses, will you know when it is appropriate to jump back in? If your patience has helped you build your nest egg then it may be just as useful now.
11. Take it easy
If you feel the urge to make a change to your portfolio, there are options to change without doing a complete overhaul. You could test the waters by redirecting a small percentage of a certain asset class to another. Another avenue is putting new money into investments that you feel are well-positioned for the future but leaves the rest untouched. You could set a stop-loss order to prevent an investment from falling below a set point or having an informal threshold that you will not allow an investment to fall before selling. Whether you need or want to adjust your portfolio during a period of turmoil, those changes can - and probably should - occur gradually. Taking gradual steps is a way to spread your risk over a period of time and also over a variety of asset classes.
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