The recent volatility in the stock markets has thrown many investors into a frenzy, and such an event could mean that it’s time to revisit your portfolio.
Investors recognize that the stock market is a highly volatile place. That is why it’s important, especially during periods of volatility, that you don’t lose your composure and remain focused on your strategy and goals.
Navigating through unstable markets can be tricky, but there are some simple investing principles that can help you find your way:
- Create a Firm Investment Strategy
Withstanding market volatility is easier to do when you have a solid investment strategy. To create a firm strategy, you will have to keep several key factors in mind, including your time horizon, financial goals, and risk tolerance.
Your time horizon involves the remaining years you have before retirement. The goal here is to have enough savings to build the income you need in retirement. Your risk tolerance will depend on your broader financial situation – your savings, income, debt, and your overall impression about it all.
Taking all those factors into consideration will give you an idea about the type of approach your strategy will take. Will it be aggressive, conservative, or somewhere in between?
- Have Enough Diversification
As the old saying goes, ‘Don’t Put All Your Eggs in One Basket’. The behavior of the market sometimes leaves even veteran traders scratching their heads. We can’t foresee how the market will perform, but we can diversify to mitigate the impact from its ups and downs.
Diversifying becomes more important during a volatile market. Spreading your investments across various asset classes like stocks, bonds, and cash will protect you from bigger losses because each asset reacts differently to the stock market.
That is not always the situation, but when one climbs in value, the other can drop.
- Understand Your Risk Profile
Investing is never without risks, and it is for this reason that you should know how much risk you can handle. Your risk profile is essential in determining the suitability of an investment product. It helps you figure out how you should diversify your portfolio between multiple industries.
More allocation to stocks or ETFs could create higher performance in the long run, but they might expose you to larger risks.
If you need the income now or as soon as possible, you should consider playing it safe by choosing low-risk investments. This move is also ideal if you can’t financially and emotionally bear the fluctuations in your investments.
If that is not the case, and you’re more focused on the long-term than the short-term, you have time on your side to help you weather and get back up from volatility.
- Think Long-term
During a volatile market, the instability can be nerve-wracking. However, emotional responses to short-term movements can cost you. It is typical for markets to rise and fall, and if history is any guide, bear markets are often short-lived.
Trying to time the market has a low chance of success. Instead, make sure that your portfolio is diverse enough, you know your risk tolerance, and you stick to your strategy during uncertain times.
For long-term investors, what matters is not the price at which the share was purchased, but how long it was held.
- Include Defensive Assets If You are Near or In Retirement
Retirement is a crucial milestone that usually comes after years or decades of careful planning. Still, even the most experienced planners can’t precisely predict how the markets would behave.
If you’re approaching or already in retirement, you might be tempted to make an early withdrawal from your portfolio. However, keep in mind that once you take that money out, it won’t have the opportunity to recover from a market dip, and that can be stressful.
Allocating a portion of the money you need right away into defensive investments can help steady assets when stocks are falling.
If you plan to tap into your investments within the next four or five years, consider holding those funds in assets that are quite liquid and less volatile than stocks, such as cash and short-term bonds.
What you need to avoid as much as possible is selling more volatile investments at a loss to finance short-term goals.
In volatile markets, it is only natural for traders to worry about their investments. While this condition is completely normal, it will test your tolerance for risk and your ability to stick towards the right path.