Market corrections are normal. Even so, not every investor knows how to handle market volatility. It is easy to feel great about your investment choices when the market is climbing, but steep drops and uncertainty can be unnerving.
Fear tends to inspire short-term thinking, and in the face of potential losses, some investors lose sight of their long-term goals and are tempted to liquidate parts of their portfolios. While this may seem like a path to protection and relief at the moment, reacting to the market can create unwanted tax implications and significantly dent your long-term gains.
Here are six tips on how to handle market volatility with a cool, objective mindset.
1. Keep Your Goals in View
As CERTIFIED FINANCIAL PLANNERs™ in the D.C. area, we work with our clients to define clear investment goals. A goals-based investing approach has several advantages, including increased stability during market changes.
Long-term goals help you maintain a broad view of your investment strategy. They empower you to stay focused and avoid being distracted by media reports and current events. You have a defined course of action and know what to do to stay on it.
While some portfolio adjustments may be warranted and beneficial as economic conditions change, selling long-term investments during or after a drop locks in your losses. It prevents you from benefiting from any subsequent recovery gains. Of course, past performance isn’t a guarantee of future performance.
2. Remember That History Is on Your Side
Historically, the market has seen and recovered from significant downturns. Wars, global recessions, and pandemics can all create considerable market shocks. However, eventually, investors who stay in the market see a strong recovery and can regain what they lost plus more.
Trying to time the market can be tempting, and occasionally investors may make a good call and get out high and buy in low. However, statistically, your money will grow more significantly by taking a long-term view of owning investments in high-quality businesses.
Managing risk during market volatility is very important. Portfolios that are aggressive enough to keep you on target with your goals but insulated and defensive enough to withstand and take advantage of the changing market/economic cycles can stand the test of time.
3. Limit How Frequently You Check Your Portfolio
If watching the market is stressing you out, limit how frequently you check your portfolio. This does not mean putting your head in the sand and avoiding conversations with your financial advisor, but if you’ve established clear long-term goals and a well-defined plan to get there, don’t torture yourself by watching the market’s day-to-day fluctuations.
Limiting how frequently you check your portfolio during challenging times is generally good for your financial and emotional well-being. It takes you out of the fight-or-flight that volatility can create and frees you to enjoy other aspects of your life.
Too much attention to today’s news can lead to second-guessing your plan. It can allow temporary market conditions to infuse unnecessary stress into the rest of your life and undermine the disciplined approach that typically delivers the best long-term results.
4. Maintain Adequate Cash Reserves
There are two critical reasons to maintain adequate cash reserves during market volatility. They are to cover your immediate cash needs and capitalize on buying opportunities.
Sufficient cash reserves protect your portfolio. Selling your long-term investments to fulfill cash needs during market declines is prohibitively expensive. It can add years to your time horizon. You lock in the (likely temporary) losses and remove yourself from benefitting from market recoveries.
Market declines also create buying opportunities. Well-established companies with strong long-term profitability can see discounted stock prices during downturns and recessions—cash reserves position you to buy quality stocks at a lower price.
5. Work With Your Advisor on Portfolio Changes
Adapting your portfolio during market volatility may be wise, depending on your life stage, goals, and investments. However, it’s essential to assess the market and your current allocations before you do.
Your financial advisor in the D.C. area can help. Financial advisors have a wealth of experience and knowledge that makes them particularly valuable during volatile times.
They can help you smooth out emotional reactions, dive deep into options, and construct a strategic plan. Your advisor has access to current research and trends as well as a historical perspective. They are also familiar with your long-term goals and can help align current choices with your financial objectives.
This clear-minded perspective is important because it is time in the market, not timing the market, which typically underpins long-term gains.
Here are a few questions you may want to ask your financial advisor in the D.C. area:
- Should I be taking action?
- What is average or expected in this market?
- If I want to take action, what are my options?
- What steps can I take to optimize my current financial situation?
6. Market Corrections Can Create Attractive Opportunities
As unsettling as it can be to watch your current portfolio shift with market changes, volatility is not always bad. Market corrections often provide opportunities.
Drops in the market can offer effective discounts on the shares of some companies’ stocks. These opportunities are hard to predict since history does not repeat itself, but strategic investments during market downturns can pay off in the long run.
When you understand volatility and its causes, you position yourself to potentially capitalize on investment opportunities to generate better long-term returns.
Market Corrections Are Normal
Market corrections are part of long-term investing. The causes of volatility are different, from politics to changes in commerce, but the pattern is consistent.
Fortunately, various investments thrive in contrasting market conditions. A diversified mix of assets helps insulate your portfolio during market changes.
Moreover, when you are mentally prepared for volatility – knowing it is part of the normal cycle – you are more likely to make sound decisions that benefit your long-term investment goals.
If you have questions about your portfolio, would like a second opinion, or want to discuss potential investment opportunities, our team of CERTIFIED FINANCIAL PLANNERs™ is here to help.
