Conventional wisdom says that what goes up must come down, but even if market volatility is seen as a normal occurrence, it can be tough to handle when money is at stake. Though there is no foolproof way to handle the ups and downs of the stock market, the following common-sense tips can help.
1. Don’t put all your eggs in one basket
Diversification is the key to managing market volatility. Spreading assets across a variety of investments such as stocks, bonds, and cash alternatives can help reduce overall risk. While diversification does not guarantee the elimination of market loss, it helps to balance declines in one type of asset with gains in another.
2. Focus on the forest, not on the trees
As the market goes up and down, it is easy to become obsessed with monitoring day-to-day returns. Instead, focus on individual investment goals and the time frame in which to achieve them. The risk tolerance associated with a long-term retirement goal may be greater than saving for a down payment on a house. The key to successful investing is to ensure each goal is aligned with the appropriate investments.
3. Look before you leap
When the market goes down and investment losses pile up, it may be tempting to pull out of the stock market altogether. This can be a stressful time with emotions playing a significant role in the decision-making process. Before abandoning an investment strategy, carefully review investment goals and time horizons to ensure changes are being made for the right reasons.
4. Look for the silver lining
Luckily, even a down market has a silver lining: the opportunity to buy shares of stock at lower prices. Dollar-cost averaging is a strategy that encourages investing a specific amount of money at regular intervals over time. Attempting to time the market is a high-stakes gamble not worth pursuing. A workplace savings plan, such as 401(k), is one of the most well-known examples of dollar-cost averaging in action. While dollar-cost averaging does not guarantee a profit or avoid a loss, continued investing through all types of market conditions may result in a lower average price per share over time.
5. Don’t stick your head in the sand
While focusing too much on short-term gains or losses is unwise, so is ignoring your investments altogether. Check the portfolio at least once a year — more frequently if the market is particularly volatile or when there have been significant life-changing events. Rebalancing the portfolio is also key, helping to ensure it remains in line with investment goals and risk tolerance.
6. Don’t count your chickens before they hatch
As many investors have learned the hard way, becoming overly optimistic about investing during the good times can be as detrimental as worrying too much during the bad. The right approach during all kinds of markets is to be realistic. Have a plan, stick with it, and strike a comfortable balance between risk and return.
John O’Rourke is First American Bank’s Private Banker and Wealth Advisor for South Florida. As a relationship manager for high net-worth individuals and their companies, he assists clients and family members with a variety of banking and wealth advisory needs. If you have any questions or comments, contact John at Jorourke@firstambank.com. First American Bank investment products are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value.
