When you have a decent chunk of your wealth in stocks, a dramatic change in the market can cause serious concerns. You might even be tempted to rethink your investment strategy or pull out of the market altogether. These dramatic shifts can be especially difficult for new and inexperienced investors to handle, but they are inevitable.
These shifts reflect the volatility of the market, and any investment strategy should be prepared to face the damaging effects of market volatility. Today, we will provide a few investing tips for a volatile market. We’ll discuss a few things investors should know and can do to improve their investment plan’s tolerance for market volatility.
Need investment help? Contact an experienced financial advisor at The Templeton Group of Cornerstone Financial Management today. Contact Us.
Volatility
With respect to the stock market, volatility is the statistical measure of a market or a security’s tendency to rise or fall quickly in a given period, usually measured by the standard deviation of an investment’s return.
While a fund that tracks the S&P 500 Index would have a standard deviation of about 15%, a savings account or certificate of deposit would have little to no volatility, because the expected return is almost guaranteed with very little variation.
Buying in a Volatile Market
Many investors find that they have benefited from market volatility by buying stocks. A sharp drop in a stock’s price may present an opportunity to invest if the target company’s underlying financial and business situation is sound and you can expect the price to rebound. If the market itself is displaying high volatility alongside drops in price, many investors may choose to buy stocks on the understanding that, over time, the market will tend to rise and they will stand to make a tidy profit. Even so, gains are never assured, and there is always a risk for loss with any investment in the stock market.
Do You Want to Ignore Volatility?
Investors may attempt to deal with volatility in a variety of ways, but the simplest method of dealing with volatility is to simply avoid it by remaining invested and not worrying about short-term changes in the market. This is the typical “buy and hold” strategy that long-term investors tend to employ because they believe the companies they invest in are fundamentally strong and will show consistent earnings. If you believe your investment plan is sound in the long-term, then it may be wise to keep your investments stable even in the face of dramatic market changes in the short-term.
How to Plan for Volatility
While no strategy is foolproof, one method for a long-term investment plan that can weather the effects of volatility is to diversify your portfolio. As a basic technique for managing investment risk, diversification works by helping reduce your reliance on a single stock, security, market, or asset within your portfolio. By diversifying your assets, you can help reduce your exposure to market volatility, so dramatic downturns in one asset class can hopefully be balanced by positive returns in others.
Practice Dollar-Cost Averaging
You can also plan for volatility by employing dollar-cost averaging, a standard investment strategy where you invest predetermined amounts of money at set periods of time regardless of price changes. For instance, you may invest $1,000 every month, or $200 every week. Because the investments are staggered in time, your money is not evenly situated, and the effect of volatility can be reduced.
Take Advantage of Stocks with Low Volatility
Investing in an array of conservative stocks that have low volatility is another potential way of reducing your exposure to market volatility. As a result, your portfolio can be more readily equipped to absorb market losses, although you are less likely to see stellar gains during market growth.
While hedging your portfolio with conservative stocks can help you tolerate short-term price drops, it will not guarantee against potential losses. More importantly, these kinds of defensive portfolios tend to underperform in the long term compared to a more traditional portfolio composition.
Remember that Volatility is Inevitable
Investment strategy is all about understanding your own risk tolerance, your financial and life goals, and where to put your money to achieve those goals while remaining within your comfort zone in terms of risk. Volatility is dangerous because it tends to encourage investors to abandon their plans and act drastically.
As a final note, investors should remember that volatility is not abnormal, and the history of the stock market shows that it will likely pass. While no past trend is indicative of future success, every serious market downturn has been succeeded by a rebound. Investors may be better served by focusing on these facts rather than dreading the possibilities that a volatile market presents.
Need investment help? Contact an experienced financial advisor at The Templeton Group of Cornerstone Financial Management today. Contact Us.
