Written by Caleb Tucker, Director of Portfolio Strategy
If you have any amount of money invested or you have been keeping up with the news, you probably get the feeling that markets have become more volatile and less predictable over the last few years. A myriad of factors contributed to this volatility, but the reasons do not change the fact that many investors feel less comfortable investing their funds in the stock market than they did in years past. Fortunately, there is no need to give in to fear. Market volatility has happened throughout modern history and it always passes with time. So, today I would like to cover some important “do’s” and “don’ts” during stock market volatility.
What To Do During Market Volatility
- DO focus on the long-term – Many times, people get so focused on recent headlines that they forget how the market has performed throughout history in spite of many major economic or societal events. Recessions come and go. Major wars or legislation have temporary effects on the economy, but these effects do not last forever. Don’t feel like you have to make a major change in reaction to recent events. Instead, focus on your long-term goals and continue to ride out the storm.
- DO continue to invest – If you had a plan to regularly add money to your investments, you should continue that strategy. Volatile markets often result in portfolios trending downwards. This can make it tempting to reduce your investments or even withdraw funds from your portfolio. More often than not, these kinds of rash decisions will end up costing you more and making you lose out on future growth.
- DO remember that market volatility is normal – As previously mentioned, volatility in markets is a historical inevitability. It happens at various periods and it will continue to happen in the future. But, given enough time, markets have always managed to work through them and grow.
What NOT To Do During Market Volatility
- Do NOT panic or overreact – Don’t constantly watch the news or check your account every 5 minutes. This will cause you unnecessary distress and increase the chances of making bad financial decisions. However, this does not mean that you shouldn’t stay informed. Just don’t overreact by making major adjustments to your allocations or investment plan. Your long-term goals and plan should drive your investment plans, not the latest headlines. For example, if experts are predicting a bear market, you might feel like selling off everything and holding onto your cash, but this will only cost you even more money in the end. Instead, relax, don’t panic, and only make minor adjustments as needed.
- Do NOT fall prey to information overload – Let’s say you are reading every headline and checking the latest investment news every day. You will probably start having a negative view of your plan just because of what is happening right now. Conflicting opinions might lead you astray and make it harder to stay focused on a singular strategy. You may even want to change your financial plan and goals entirely. Not only will this negatively impact your long-term strategy, but it could cause you to assume that what is happening now will continue happening for the next 30, 40, or 50 years (which is never the case).
- Do NOT forget to stay diversified – If you lose diversity in your portfolio, you open yourself up to more volatility later on. Diversified investments are specifically encouraged by financial advisors because they strive to make you less susceptible to risk. When markets become less predictable, diversification can be used when attempting to mitigate losses.
As you can see, a volatile stock market has a negative psychological effect on many investors. Fear and short-term thinking often take over, exacerbating market fluctuations and costing individual investors a fortune in the process. So, rather than giving in to fear or alarmist headlines, focus on your long-term strategy and understand that market volatility is a natural part of investing.
Want to learn more about weathering the storm during a volatile market? If so, be sure to contact Merit Financial Advisors today!
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Merit Financial Group, LLC, an SEC-registered investment adviser. Merit Financial Group, LLC and Merit Financial Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.