Investing During Stock Market Volatility

The combination of international conflict and an increase in market volatility has paved the way for a very challenging economic environment where even the most seasoned investors are reconsidering their investment portfolios. Many events can trigger market fluctuations; including shifts in government policies, changes in economic data, pandemics, international crises, and much more. While we cannot control how these forces will impact the market, we can take the necessary steps to mitigate their impact.

Bouts of market volatility are expected and it is an inescapable aspect of long-term investing. As unnerving as it may seem, you should expect to experience market declines periodically throughout the course of your investing career. We agree – staying the course takes immense discipline and patience which can be very hard to muster during uncertain times; watching the value of your portfolio decline can be heartbreaking and being calm in the midst of a market crash takes strength. However, you need to remember that this market turbulence is only a temporary setback. The stock market has always recovered from crashes before and will most likely recover from this volatility too.

So, what can investors do when volatility spikes and markets come crashing down? First, take a deep breath and remember why you are investing in the first place. Think about your financial goals and if it is long-term (such as investing for retirement), then being patient is the best thing to do. Remember that most of the market’s worst trading days have been within one month of the best days.

While it’s hard to keep your emotions at bay amid market volatility, your emotions shouldn’t dictate your investment decisions. Also, when the value of your portfolio declines and the market crashes, you’re bound to attract a lot of unsolicited financial comments and advice from non-professionals who will be quick to throw doomsday predictions. You need to ignore such comments and know that selling out of the investment at the wrong time can end up being a very costly mistake. Remember, time in the market is far more important than ‘timing’ the market.

Having said that, it’s hard to just sit idly when the market is sliding. Here are some things to consider during market volatility.

Analyze Your Investment Strategy

If you have a strong investment strategy in place, then living with market volatility becomes a lot more manageable. When creating your strategy, you need to understand some key factors, such as:

– Your goals (to accumulate enough savings)
– Your time horizon (the number of years left until you plan to retire)
– Tolerance for risk (considering your savings, income, and debt)

Considering the above will direct you as to what type of investment strategy you need to follow, whether it should be a conservative, aggressive, or healthy mix of both.

Do Not Sell Based Only on Recent Market Movements

When you sell stocks when the markets drop, you often end up making temporary losses as permanent setbacks. It’s important to sit back and take into account the future prospects of an investment and the role it plays in your portfolio. As an investor, if you are concerned about increasing cash on hand, then you could direct any new contributions to a money market account without exchanging investments out of stocks at once. Doing so will enable you to revisit your allocation strategy when the market is in a better position.

Take A Far-Sighted Approach

In your investment career, you are bound to experience significant declines as markets typically fluctuate. Calm these jitters by focusing on long-term goals and trends. Even from a historical standpoint, the time has reduced the risk of holding a diversified stock portfolio. Sometimes, you just need to ignore all the noise and stay focused on your plans.

Diversify Your Portfolio

A good way of weathering market downturns is to own different types of investments. Consider spreading your investments across these asset classes – stocks, bonds, and short-term investments. You can further offset the risk by diversifying the investments in each asset class. This is because volatile markets tend to reveal portfolios that owners believed were well diversified but in reality, were not so. Having a thorough understanding of each asset class and aligning it with your target asset allocation is the way to go.

Review Your Risk Capacity & Tolerance

Risk capacity is your financial capacity of handling a loss, while risk tolerance is your emotional ability to handle huge price swings. Risk capacity should be in your mind at all times, but market volatility tests one’s risk tolerance levels. You need to consider if you own sufficient cash to handle your goals. Also, if you need money soon, then you cannot afford to lose it amid a market crash. Rather, it would be a better option to invest in stable assets such as Treasury Bills, money market funds, or Certificates of Deposit (CODs).

Include Defensive Assets

Defensive assets such as Treasury securities, US government bonds, cash, or its equivalents can stabilize your portfolio when stocks are slipping. If you are hoping to spend out of your portfolio shortly, then keep that money in assets that have been relatively liquid and less volatile than stocks. Doing so will ensure that you do not have to sell in a down market.

If You Plan to Retire Soon, Be Very Cautious

Those who are facing impending retirement are the ones most likely to be affected by stock market volatility. Data proves that the stock market bounces back more than 90% of the time over rolling five-year periods, but how to get through the lean years as you wait for the market to rebound when you are nearing retirement? A good idea would be to keep some living expenses in cash and short-term securities such as the UK Treasuries. Indeed, these investments will not make a lot of money over time, but they will certainly protect the principal you need to withdraw money for your living expenses.

Bottom Line

Markets will rise and markets will fall; this is just the way things are – but, along with these fluctuations, there will also be new opportunities. Your financial future is in your hands, so you need to take control of it. Arm yourself with a strong baseline of knowledge and learn everything you can about investing. Doing so will ensure that you can invest your hard-earned money in the right areas to align with your financial goals. You can lean on a financial consultant for this, who will help you to efficiently plan and deal with market volatility and create a curated financial plan for you.