How to Stay the Course During Times of Volatility
It’s understandable to be concerned about your portfolio during short term fluctuations in the stock market. While experiencing periods of volatility or a down-turn it the market, things often seem worse than they really are. Keep in mind that market corrections are to be expected and, over time, the market has always trended upward.
Understanding the nature of the stock market, what you are invested in and how performance may vary can help calm anxiety during a decrease in the market. Knowing what to expect and understanding that volatility is inevitable will help you avoid an emotional reaction to short term market swings. Emotions lead to impulsive decisions that are usually harmful to your investment performance.
Don’t let fear drive changes to your asset allocation. Switching investments and selling stock when the market drops will lock in losses and make it more likely to be out of the market when it rebounds. Not only would you need to accurately project when to sell but when to get back into the market. It’s near impossible to predict the future direction of the market. If you pull out of the market you may miss a rally and some of the highest performing days. Historically, the biggest gains in the stock market take place on just a few days and being out of the market on these days can greatly harm your long-term returns.
The stock market is for long-term investing and you should have an investment plan that supports your long-term goals. Your plan should include adequate liquidity to cover short term needs with enough risk to allow for growth. The stock market is inherently risky, and your investment plan should reflect the amount of risk that meets your needs and your comfort level. Volatility should be built into your investment plan. If your long-term goals haven’t changed, you shouldn’t change your portfolio based on short term market fluctuations. Focus on progress toward long-term goals not short-term investment performance.
To keep your plan on track, rebalance your portfolio on an annual basis. In a bear market you may need to buy stock to bring you asset allocation in line with target levels. This provides an opportunity to buy additional stock while prices are low. Another way to take advantage of low stock prices is to use dollar cost averaging. This involves systematically investing a set dollar amount into the stock market every month. When the market is down you can buy more shares for the same expenditure.It’s easier to stick to your plan if your financial life is in good shape. This includes maintaining a diversified portfolio, managing debt, saving at least 15% of your income, spending less than you earn and maintaining an emergency fund. Keeping your financial affairs in order will help you maintain a long- term focus and weather major market fluctuations with minimal stress and anxiety.