Surviving Volatility

Markets in the past month have been whipsawing back and forth, this volatility has caused a lot of investors to retreat to cash until the markets show some direction. While this may be a prudent play if you are a day trader, it is not if you are a long term investor. Here are 5 things you should know to understand how to survive a volatile market.

1. Watching From The Sidelines May Cost You.

When markets become volatile, a lot of people try to guess when stocks will bottom out. In the meantime, they often park their investments in cash. But just as many investors are slow to recognize a retreating stock market, many also fail to see an upward trend in the market until after they have missed opportunities for gains. Missing out on these opportunities can take a big bite out of your returns. Consider that in the 12 months following the end of a bear market, a fully invested stock portfolio had an average total return of 36.8%. However, if an investor missed the first six months of the recovery by holding cash, their return would have been only 7.6%.

2. Dollar Cost Averaging Will Help You.

Most people are quick to agree that volatile markets present buying opportunities for investors with a long-term horizon. But mustering the discipline to make purchases during a volatile market can be difficult. You can’t help wondering, “Is this really the right time to buy?” Dollar-cost averaging can help reduce anxiety about the investment process. Simply put, dollar-cost averaging is committing a fixed amount of money at regular intervals to an investment. You buy more shares when prices are low and fewer shares when prices are high, and over time, your average cost per share may be less than the average price per share. Dollar-cost averaging involves a continuous, disciplined investment in fund shares, regardless of fluctuating price levels.

3. This Is a Great Time For a Portfolio Checkup.

Is your portfolio as diversified as you think it is? Meet with us to find out. Your portfolio’s weightings in different asset classes may shift over time as one investment performs better or worse than another. Together with your advisor, you can re-examine your portfolio to see if you are properly diversified. You can also determine whether your current portfolio mix is still a suitable match with your goals and risk tolerance.

4. Tune Out The Noise.

Numerous television stations and websites are dedicated to reporting investment news 24 hours a day, seven days a week. What’s more, there are almost too many financial publications and websites to count. While the media provide a valuable service, they typically offer a very short-term outlook. To put your own investment plan in a longer-term perspective and bolster your confidence, you may want to look at how different types of Asset Allocation models have performed over time. As you will see, while equities may be more volatile, they’ve still outperformed bonds and cash over longer time periods.

5. Believe Your Beliefs And Doubt Your Doubts.

There are no real secrets to managing volatility. Most investors already know that the best way to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio. But sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you sometimes begin doubting your beliefs and believing your doubts, which can lead to short-term moves that divert you from your long-term goals. To keep from falling into this trap, give us a call before making any changes to your portfolio.