Volatile markets can inspire feelings of fear and anxiety among investors. Market ups and downs can occur for any number of reasons, including inflation fears, trade policy concerns, tax breaks, economic optimism, global events, or a recession. When the stock market turns shaky, focusing on your overall financial picture, combined with good planning, can pay dividends.
These five steps can help you steady your pulse during market spikes and increase your financial security:
1. Review your financial goals. Setting clear, prioritized goals, each with steps to achieve the goal, a price, and a time frame, will help guide your investment approach. Good financial goals, tied to a solid long-term financial plan, will generally survive short-term market ups and downs and help you weather the shocks of inflation and other economic conditions.
2. Diversify your assets. A significant market move can illuminate concentration risk, the risk of amplified losses that can occur from holding a large portion of your holdings in a particular investment, asset class or market segment relative to your overall portfolio. It is important to diversify between and within major asset classes. Do you have multiple asset classes (such as stocks, bonds, and cash equivalents)? Are your stock holdings spread across different sectors (biotech, electronics, consumer staples, and emerging markets, to name a few)? Is your bond portfolio diversified by issuer and type of bond (corporate, municipal and Treasury)?
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3. Focus on your future. Avoid impulsive decisions when markets become volatile or economic conditions change. Instead, go back to Tip 1 and note that strategies like dollar cost averaging can help you stay focused on your future. Dollar cost averaging involves investing your money evenly at regular intervals instead of all at once, or automating deposits into savings or investment accounts. This can reduce or remove the emotion from decision making and supports continued investment, even in times of rising inflation.
4. Understand the impact of changing interest rates. When stock markets are volatile, demand for fixed income products tends to increase, which in turn can drive up prices and lower yields. When interest rates eventually rise again, bond prices generally fall. But interest rate risk is one of several factors to consider when investing in bonds and other fixed income products, such as bond mutual funds or ETPs. For example, duration risk, which is the risk associated with a bond’s price sensitivity to a 1 percent change in interest rates, is another factor to consider. Research the risks of investment products and strive to balance assets to minimize the effects of changes in interest rates on your portfolio as a whole.
5. Protect your money. Fraud is a growing threat and financial fraudsters operate in all market conditions. In times of high market volatility, investors may be particularly vulnerable to pitches promoting “risk-free” returns guarantees. Combining a guarantee with a specific amount of money you’ll earn (“this is a safe investment that will earn you $6,000 every quarter”) is a highly effective tactic known as phantom wealth. You can avoid fraud by working only with registered investment professionals (using FINRA BrokerCheck to find out if a person is registered to sell securities) and following your predetermined financial plan.
Investors who need short-term liquidity—for example, if you plan to make a large purchase soon or know a tuition bill is due soon—will probably want to take a different path than investors who don’t need cash right away. . All things being equal, the latter group might be better able to digest short-term volatility. But any investor who can’t bear to insure losses in times of volatility, or can’t afford to do so, may want to explore less volatile alternatives to help secure the value of their portfolio.
Stock market fluctuations are beyond the control of any individual investor. So control what you can and focus on key investment concepts like staying diversified and rebalancing to stay aligned with your goals.
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