Four Things to Consider in Volatile Markets

If the recent market volatility has you second guessing your investment strategy or whether you should stay in the market, here are some helpful points that could assist you in achieving your financial goals.

1. Diversify Your Portfolio

To help manage risk, consider diversifying your portfolio with different types of investments. Broadly speaking, investments such as stocks and real assets like agriculture and real estate respond well to growth – growing corporate profits, growing incomes around the world or in some cases overall population growth. Other investments such as bonds or certain guaranteed investments can help provide some stability to your portfolio when markets are volatile or to meet income needs in retirement.

2. Rebalance Your Portfolio

You should review your portfolio and rebalance it periodically if necessary adjusting it based on prolonged market moves and your stage in life. For example, if we’re in a period when stocks have moved down for a prolonged period of time relative to bonds, then purchasing some additional stocks may be the right thing to do. As you move closer to retirement, or through retirement, generally speaking, increasing the proportion of your portfolio in bonds and certain guaranteed assets may make sense.

3. Re-evaluate your emergency fund

From time to time, you should revisit the amount of cash you have on hand for emergency situations. Having the right cash position and insurance, especially when markets are volatile, can help ensure you won’t have to sell your portfolio during market downswings.

4. Don’t lose sight of your long-term financial goals

Resist the temptation to stop systematic investments. Moreover, don’t let periods of high volatility make you to lose sight of your long-term financial goals or the opportunities that are created by investing in times like these. Having a well-thought-out financial plan and investment strategy can help keep you on course when the markets are in their most volatile period. Your financial plan should be designed to provide a clear roadmap for achieving a range of needs and goals – from paying monthly rent or mortgage and saving for college, to investing for retirement. A financial advisor can assist with your financial plan and investment strategy.

Four Mistakes to Avoid in Volatile Markets

There are some important lessons from the global economic crisis of 2008-2009 that can help you cope with recent market volatility.

  1. For starters, one mistake that you should avoid is not having the right asset mix to weather the ups and downs of the market or one that matches your risk tolerance. Accordingly, your asset allocation should align with your investment goals – meaning the mix of stocks, bonds, cash (and potentially other asset classes and sub classes) must match your tolerance for risk and investment time horizon.
  2. When the going gets tough you shouldn’t necessarily head for the exit door. If you feel that market volatility is jeopardizing your financial goals, it may be time to consider reviewing your current investment mix relative to your financial goals. Also avoid making investment decisions based on your emotions, namely selling in down-turns and chasing performance. Let’s look at an example: The market plunged 43% from its peak in October 2007 to its trough in March 2009, based on the Russell 3000® Index, a proxy for the U.S. stock market. Investors who stayed the course benefited from the market’s strong rebound, recouping about 97% of their losses by April 2011. (Returns are based on a stock index, not actual investor returns. Index performance does not include investment fees or transaction costs, and does include dividends.) So, for your long-term investment strategy to work, you must stick with it!
  3. Another mistake that you should avoid is chasing performance. Keep in mind that over time, each asset class will take its turn as the leader or laggard. When you see an investment or asset class performing well, it is only natural for you to want to be a part of that success. The reality of the situation is that by the time you realize who is the “leader,” most of the gains have already been realized. Selling an underperforming position that might soon become a leader can further lock in losses. A key takeaway is that since the market’s future direction is impossible to predict, staying the course with a diversified portfolio that is able to withstand the inevitable short-term volatility may help you to your investment goals.
  4. Finally, it’s never a good idea for you to try to time the market. Don’t forget that in order to be a successful market timer, you need to get it right twice – once when you sell and again when you buy. This is extremely difficult even for life-long investment professionals. To avoid the traps of market timing, developing a disciplined investment plan (where you invest a certain amount according to a set time table monthly) can help remove the emotion created by volatility. Sticking with an existing investment plan (or starting a new one to get back into the market) allows for disciplined buying in times when its toughest – though ultimately allows you to buy when prices are low. Creating the proper investment strategy, rebalancing it periodically and staying on track to meet your goals may increase your chances of success.