By Jeffrey C. Simon, CFP®
RBC Wealth Management
It seems market volatility has become the norm versus the exception since 2008. We did have a brief period of calm from last October to the recent high in April. Keeping your cool can be hard to do when the market goes on one of its periodic roller-coaster rides. It's useful to have strategies in place that prepare you both financially and psychologically to handle market volatility. Here are 11 ways to help keep yourself from making hasty decisions that could have a long-term impact on achieving your financial goals.
1. Have a game plan.
Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You also can use diversification to try to offset the risks of certain holdings with those of others.
2. Know what you own and why.
When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits in your portfolio also can help you consider whether a lower price might actually represent a buying opportunity.
3. Remember that everything's relative.
Most of the variance in the returns of different portfolios can generally be attributed to their asset allocations. If you've got a well-diversified portfolio that includes multiple asset classes, it could be useful to compare its overall performance to relevant benchmarks. If you find that your investments are performing in line with those benchmarks, that realization might help you feel better about your overall strategy.
4. Tell yourself that this too shall pass.
The financial markets are historically cyclical. Even if you wish you sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may get another chance. Even if you're considering changes, a volatile market can be an inopportune time to turn your portfolio inside out.
5. Be willing to learn from your mistakes.
Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best aren't right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience and apply the lesson to future decisions. Expert help can prepare you and your portfolio to both weather and take advantage of ups and downs.
6. Consider playing defense.
During volatile periods in the stock market, many investors re-examine their allocation to such defensive sectors as consumer staples or utilities (though like all stocks, those sectors involve their own risks and are not necessarily immune from overall market movements).
7. Stay on course by continuing to save.
Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset, even in part, by new savings, your bottom-line number might not be quite so discouraging. If you're using dollar-cost averaging — investing a specific amount regularly regardless of fluctuating price levels — you may be getting a bargain by buying when prices are down.
8. Use cash to help manage your mindset.
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you've established an appropriate asset allocation, you should have resources to prevent selling stocks to meet ordinary expenses or a margin call.
9. Remember your road map.
One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Make sure your asset allocation is appropriate before making drastic changes.
10. Look in the rearview mirror.
If you're investing long-term, sometimes it helps to look back and see how far you've come. If your portfolio is down this year, it can be easy to forget any progress you may already have made. Though past performance is no guarantee of future returns, of course, the stock market's long-term direction has historically been up. With stocks, it's important to remember that having an investing strategy is only half the battle; the other half is being able to stick to it. If patience helped you build a nest egg, it just might be useful now too.
11. Take it easy.
If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class into another. Taking gradual steps is one way to spread your risk over time as well as over a variety of asset classes.
Jeffrey Simon's website is jeffreycsimon.com. He works at RBC Wealth Management, a division of RBC Capital Markets LLC, member NYSE/ FINRA/ SIPC.