Over the past decade and a half, the financial markets have been on a thrilling (more likely gut wrenching) roller coaster ride. During these times, daily interjections of bad news and cataclysmic market meltdown predictions make it seem like the end of times is near. It can spark anxiety, fuel uncertainty and trigger far-reaching decisions in even the most seasoned investors fall prey to. The coronavirus pandemic has clearly infected the financial markets, putting Wall Street and investor psychology to the test.
But panic is not an investment strategy. It is important to keep perspective when the markets get choppy. Here are a few strategies to consider when volatility arrives and the headlines scream “doom”.
1) Stick to Your Plan. A sudden drop in the market can have dramatically different implications for someone just starting early in their careers vs someone who is nearing retirement. What is important is that you understand your situation and your financial plan. If you do find yourself stressed out, contact your financial planner and see how your plan is holding up. Both now and in prior market downswings (and subsequent recoveries).
2) Stay invested. Never try to time the market. A multiplicity of research reports has shown investors invariably sell at the wrong time whenever there is a lot of sudden market volatility. And then compound the problem by waiting too long to buy back into the market. One key to living with market volatility is to focus on Time “IN” the Market – not trying to time the market. Over time, the market always recovers.
3) Stay Diversified. Diversification is one of the keys of successful investing. There are many strategies available. Allocating assets both geographically (domestic and international) and by market capitalization (Large Cap, Mid-Cap, Small-Cap) are excellent ways to reduce a variety of risks to your portfolio. As markets change, your portfolio should be rebalanced to take advantage of the prevailing situation. Rebalancing is key to taking advantage of market turmoil. Periodic rebalancing is an excellent way to rotate between overvalued assets into undervalued assets thereby enhancing your portfolio’s returns.
Volatility in the financial markets can be an intimidating and scary time for your investments. However, they are a part of life and will happen from time to time. Remember, the world is not ending when it happens. The markets will recover and if you stick to your plan, stay in the markets and rebalance a diversified portfolio, you will come out ahead.