Can you keep the peace when the capital markets go into a fit of volatility? It's useful to have strategies in place that prepare you and your money to handle the roller-coaster ride of market volatility. Here are 11 ways to help you keep from making hasty decisions that could have a long-term impact on your financial goals.
1. Have an investment plan.
Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating decisions. For example, you can use diversification to offset the risks of your portfolio holdings. Diversification may not ensure a profit or guarantee against a loss, but it can help you understand and balance your risk in advance. And you might determine in advance that you will rebalance your portfolio by taking profits when an asset class rises by a certain percentage and buy another asset class when it has fallen by a set percentage.
2. Know what you hold and why.
When you feel like the capital markets are a roller coaster going off the tracks, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold true, regardless of what the capital markets are doing. Understanding how a specific asset class fits in your portfolio also can help you consider whether undervalued assets might actually represent a rebalancing opportunity. And if you don't understand why a security is in your portfolio, find out. That knowledge can be particularly important, especially if you're considering replacing your current holding with another investment.
3. Remember the principles of relativity.
Most of the variance in portfolio return is generally attributed to asset allocation. If you've got a well-diversified portfolio that includes multiple asset classes, it could be useful to compare overall performance to relevant benchmarks. If you find that your portfolio performs in line with relative benchmarks, that realization might help you feel better about your investment strategy. Of course, even a diversified portfolio is no guarantee that you won't suffer loss. However, diversification means that just because the S&P 500 might have dropped 10% or 20% doesn't necessarily mean your portfolio is down by the same amount.
4. Remember your history lessons.
Historically, the capital markets are cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you're considering changes, a volatile market can be an inopportune time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of sound investment planning.
5. Remain humble.
Anyone can look good during bull markets. However, prudent 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 experience, and apply the lesson to future decisions. Expert help can prepare you and your portfolio to plan your investments, implement a prudent strategy and monitor your plan.
6. Consider a financial review.
During volatile periods many investors reexamine their allocation. Defensive sectors like consumer staples and utilities (although like all investments, sectors involve risk, and are not immune from global market movements). Dividends also help cushion the impact. According to Standard and Poor's, dividend income has represented roughly one-third of the monthly total return on the S&P 500 since 1926, ranging from a high of 53% during the 1940s to a low of 14% in the 1990s. Prudent investors focus on the return of capital and the return on capital.
7. Continue saving money.
Even if the value of your portfolio fluctuates, regularly adding money to an account designed for the long-term goal cushions the emotional impact of market volatility. If losses are offset even in part by new savings, your bottom-line 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 buying when prices are low. Dollar-cost averaging does not guarantee a profit or protect against a loss. Consider your ability to continue investing. Systematic investment plans work best if you when you buy when prices are low. Remember that your principal fluctuates with changes in market conditions. Share values may be worth more or less than their original cost when you sell them.
8. Cash flow helps to manage the process.
Cash can flow enhances your ability to make thoughtful decisions instead of impulsive ones. If you've established an appropriate asset allocation, you have resources in reserve to meet living expenses. Having a cash reserve and a disciplined investing strategy can change your perspective on market volatility. Knowing that you're positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.
9. Remember your investment policy.
Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance in some asset classes may help offset poor performance by others. Even with an appropriate asset allocation strategy, some parts of a portfolio may struggle at any given time. This is systemic risk. Market timing is a zero sum game. Make sure your asset allocation is appropriate.
10. Glance in the rear-view mirror.
If you're investing long-term, sometimes it helps to take a look back and see how far you've come. If your portfolio is down, it can be easy to forget the progress you already made through the years. Of course, past performance is not a guarantee of future returns. Historically, the equity markets long-term direction outperforms other asset classifications. It’s important to remember that having an investing plan is important, yet implementing your strategies and monitoring progress is just as important.
11. Take it easy.
If you feel that you need to make changes in your portfolio, there are ways to do so. You can redirect a percentage of one asset class into another. You can invest a percentage of your cash flow into undervalued asset classes. You can set a stop-loss order to prevent investments from dropping below a certain price or have an informal threshold below which you will not allow an investment to fall before reallocating assets into that classification. Even if you need or want to adjust your portfolio during a period of volatility, those changes can – and in my opinion must happen gradually. Rebalancing is helps spread systemic risk over time as well as throughout your portfolio.
Words of the Wise
Warren Buffett: “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”
Benjamin Graham: “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble ... to give way to hope, fear and greed.”
Peter Lynch: “In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten.”
Remember that while diversification, asset allocation and dollar-cost averaging are sound investment strategies, they cannot guarantee a profit or eliminate the possibility of loss.
Your Financial Advisor
Bryant Wealth Management, Inc. is a Washington USA small business corporation providing fee-only financial planning services for individuals, families and small organizations. The information presented here is not specific to anyone's personal circumstances. We issue this general advice for educational purposes based upon publicly available information from sources believed to be reliable. However, we cannot assure the accuracy or completeness of these materials as they may change at any time and without notice. Contact your financial advisor.
Dr. Chris Bryant, MBA, RFC® is an American author, consultant, and speaker whose practice helps people enjoy life, achieve goals, and establish legacy.
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Chris Bryant is an American financial advisor.