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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 ten ways to help keep yourself from making hasty decisions that could have a long-term impact on your ability to achieve your financial goals.
1. Have a game plan
Having a financial plan with an integrated portfolio that recognizes the potential for turbulent times can help prevent emotion from dictating your decisions. For example, by determining your long-term financial goals and time horizon, you can determine what type of risk and return your portfolio needs to generate to bring you closer to success. You might take a core-and-satellite portfolio approach, combining the use of passive buy-and-hold principles for the bulk of your portfolio with active managers who can provide some alpha opportunities. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or guarantee against a loss, but it can help you understand and balance your risk in advance. Having a game plan can help you have the disciplines needed to help you stick to your long-term strategy. To learn more, consider reading our blog, “Short-Term Volatility- What’s Your Move.”
2. Know what you own and why you own it
When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold, regardless of what the overall market is doing.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. And if you don’t understand why a security is in your portfolio, find out. That knowledge can be particularly important when the market goes south, especially if you’re considering replacing your current holding with another investment. To learn more about our Intelligent Investing Wealth Management Philosophy, click here.
3. Remember that everything is 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. Keep in mind that even a diversified portfolio is no guarantee that you won’t suffer losses. However, remember that whether you are on track to meet your long-term goals may be the best benchmark of all.
4. Tell yourself that this too shall pass
The financial markets are historically 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 good investment planning.
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 investors aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to harvest your 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 the market’s ups and downs.
6. Consider dollar-cost averaging
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. However, dollar-cost averaging can’t guarantee a profit or protect against a loss. Also, consider your ability to continue purchases through market slumps; systematic investing doesn’t work if you stop when prices are down. Finally, remember that the return and principal value of your investments will fluctuate with changes in market conditions, and shares may be worth more or less than their original cost when you sell them. To learn more, consider reading our blog on “Practical Tips for Lump Sum Recipients.”
7. Use cash to help manage your mind-set
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 on hand to prevent having to sell stocks to meet ordinary expenses or, if you’ve used leverage, a margin call. Having a cash cushion coupled with 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.
8. Remember your road map
Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that the 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. Timing the market is not consistently effective. Wildly volatile markets can magnify the impact of making a wrong decision just as the market is about to move in an unexpected direction, either up or down. Make sure your asset allocation is appropriate before making drastic changes. For more information, consider our blog, “Don’t Just Do Something, Sit There- The Power of Restraint.”
9. Look 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 this year, it can be easy to forget any progress you may already have made over the years. 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. Even if you’re able to avoid losses by being out of the market, will you know when to get back in? If patience has helped you build a nest egg, it just might be useful now, too. For more information on our investor emotions, consider reading our page on the importance of behavioral coaching.
10. Get Professional Help
For some things in life, it is best to have a “do-it-yourself” mentality. For other things, it is best to seek a professional. You wouldn’t want to perform surgery on yourself, would you? When it comes to money, there aren’t many things more stressful. At Intelligent Investing, our goal is to minimize financial stress to maximize lives.
We are an independent boutique firm serving high net worth individuals and families. We have in-house portfolio management expertise. By integrating Chartered Financial Analyst (CFA) Institute principles and philosophies, we strive to strike an appropriate balance of risk and reward for each portfolio we design. We thoroughly test our portfolios based on analyses from various third-parties (i.e., Vanguard, BlackRock, JPMorgan, PIMCO, to name a few). We have a rigorous risk-management approach that assists in helping our clients remain invested through bull and bear markets.
We hope these ten tips will help keep yourself from making hasty decisions that could have a long-term impact on your ability to achieve your financial goals. We’d be honored to help achieve your goals, and can provide a complimentary risk assessment and portfolio review based on your current portfolio. Please let us know how we may serve you best.
Source: Some of the material used comes from Broadridge Investor Communication Solutions, Inc.