Market volatility may seem frightening, but it is a natural cycle. Changes are inevitable, and anticipated fluctuations should not create a fear of investing. Instead of avoiding the investment market entirely, be prepared for shifts with the following four tips.
1. Stay Calm
Rest assured that the domestic and global markets, which are comprised of thousands of businesses, remain strong. With a well-diversified portfolio that is uniquely situated for your specific long-term goals and objectives, you can take a deep breath and know you have a plan that factors in market volatility.
Historically, markets have recovered very well in times of turmoil. Downward turns in the markets have inevitably been followed by upward movement; thus, is the nature of markets! For example:
*This chart reflects adjusted close price adjusted for both dividends and splits. Data is historical. Past performance is not a guarantee of future results.
The blue line represents the actual growth of the S&P 500 over the past 30 years. On April 1st 1988 the S&P closed at 261.33 and on April 1st 2018 the S&P closed at 2639.4. While there were bumps along the way the overall trend has been upward.
The orange line represents what many investors want and sometimes expect: no market turbulence and only upward movement. While the latter is unrealistic, both scenarios produce the same result.
If an individual made an investment on April 1, 1988, and stayed in the market for 30 years, the amount would have grown over 1,000 percent. The moral: when approaching long-term retirement plans,
stay calm and invested through market movement.
2. Stay Invested
Remaining calm and invested is vital to maximize the performance of an investment. While cyclical, exact market shifts are not predictable. Missing just a few good days can cost thousands of dollars.
Consider the example below:
*Data is historical. Past performance is not a guarantee of future results.
Remember, investing is a long-term plan. While markets may move from day-to-day, you are in it for the long-haul. Market volatility may be an emotional experience. However, pulling out of the market at the first sign of volatility can result in lost money and cause damage to an overall financial plan.
3. Do Not Make an Emotional Decision
Investors may struggle to separate their emotions from their investment decisions. When the market is high, investors may feel excited and invest at high prices. Once there is a downturn, fear can set in leading investors to offload their investment at a lower cost. This dangerous cycle of excessive optimism and fear leads to poor decisions at the worst time.
Time, not timing, is the best way to capitalize on the stock market's gains.
4. Take Advantage of Opportunities
Talk to your financial adviser to see if there are any opportunities during volatile market conditions. In a diversified portfolio, you may have a mix of large-cap, small-cap, foreign and domestic investments along with bonds and cash. The movement of the market could have changed the proportions of your holdings in each of these categories. You may want to re-balance to get back to your original investment strategy. This approach may also allow you to take advantage of lower prices during market turmoil.