Market volatility seems to be a life constant and the causes numerous. Are we getting along with this country? How do the new rules regarding that industry affect the markets? What about cryptocurrency? Did this company sell enough phones? What about this company that's losing billions of dollars per year? What are the Feds doing? And so forth. Couple that with the never ending news cycle and it can get exhausting.
What to do about it? Below, I provide a few tips on handling market volatility.
First, understand that it's completely normal to feel a bit of anxiety or disappointment when watching the market bounce around or opening your quarterly investment statement. Loss aversion is our tendency to prefer avoiding losses over acquiring equivalent gain. After acknowledgement, try to put the events or volatility into perspective. Ups and downs are to be expected; they've happened in the past and they'll likely to continue into the future. In fact, it would be very abnormal if the market acted in a straight line.
Have a Plan
What is the money for and when do you need it? Answering those two fundamental questions will help you decide how to invest your dollars. Match your investments with your goals. Shorter term goals such as saving for a home renovation in the near future lend themselves to seeking safety of principal and liquidity; it's probably not recommended to put those dollars in the next high flying tech startup. On the other hand, longer term goals, such as retirement, should be invested in a way to grow. With a longer term horizon, more volatility comes into the picture. Over time, investors are rewarded for their long-term patience.
Matching your goals to the appropriate investments help keep perspective. While you may notice your retirement portfolio moving up and down, you can remind yourself that you won't need to start drawing on those dollars in the near future. If you're very close to retirement or already drawing from your portfolio, it helps to remember that retirement will likely be many years and that different pieces of your portfolio have different tasks. A well constructed retirement portfolio will likely have cash, fixed income, and equity. Meanwhile, you can rest easy knowing that next summer's vacation fund is safe in cash waiting for you start making reservations.
Ideally, you want to have an appropriate mix of equity, fixed income, and cash taking into account your risk tolerance and time horizon. See the point above about having a plan. Different investments react to the market differently: some will be up while others are down. Some will react more severely when compared to others. The purpose of diversification is risk reduction and not return maximization. Diversifying over multiple asset classes can help smooth out the ride.
Stay the Course
When the markets act up, it can be easy to consider selling everything, going to cash, and waiting it out. However, market timing is incredibly difficult, if not impossible. Essentially, you need to be right twice: once when you sell and again when you buy.
If you are considering making changes to your portfolio, take a step back and attempt to understand why. Is it because of the market itself or is because you're life is changing (retirement, starting a family, etc.)? If you (or rather your life situation) isn't changing and you're invested appropriately, to paraphrase Jack Bogle, it's often best to stay the course.
But Be Flexible
We have a lot of control over our financial lives. Any good financial plan should take into consideration contingencies and allow for flexibility. Maybe some sacrifices will need to be made such as saving and investing more, working longer, or cutting back in certain spending categories. Alternatively, you may be in a situation where you may not need as much growth as had been anticipated and you can attempt take some of the volatility off of the table.
Having a plan in place can help provide peace of mind during times of market turbulence. Knowing what you need and when will will help guide the portfolio allocation process. Allowing flexibility within your plan keeps the ultimate control with you and gives you a better chance for long-term success!
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, investment, tax, legal, or accounting advice. You should consult your own competent financial, tax, legal, and/or accounting advisors before engaging in any transaction.