Volatile markets can trigger feelings of fear and anxiety among investors. Market ups and downs can happen for any number of reasons, including inflation concerns, trade policy concerns, tax breaks, economic optimism, global events, or the watch for a recession. When the stock market is swinging, focusing on your overall financial picture, along with proper planning, can pay off.
These five steps can help stabilize your pulse during market rallies and increase your financial security:
1. Reconsider your financial goals. Setting clear, priority goals – each with steps to achieving the goal, a price and a time frame – will help guide your investment approach. Good financial goals, linked to a sound long-term financial plan, usually survive short-term market fluctuations and help you withstand the effects of inflation and other economic conditions.
2. Diversify your assets. A significant market movement can highlight concentration risk, and the risk of magnified losses that may occur from owning a significant portion of your holdings in a particular investment, asset class or market sector relative to your overall portfolio. It is important to diversify across and within major asset classes. Do you own multiple asset classes (eg stocks, bonds, etc.)? Are your stock holdings spread across different sectors (biotech, electronics, consumer goods, emerging markets, to name a few)? Is your bond portfolio diversified by issuer and bond type (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 know that strategies like dollar cost averaging can help you stay focused on your future. Average dollar cost involves investing your money in equal parts at regular intervals rather than investing it all at once, or automating deposits into savings or investing accounts. This can reduce or remove sentiment from the decision-making process and support continued investment, even in times of high inflation.
4. Understand the impact of changing interest rates. When stock markets are volatile, demand for fixed income products often rises, which in turn can drive up prices and lower returns. When interest rates eventually rise again, bond prices generally fall. But interest rate risk is one of a number of 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 the sensitivity of a bond’s price to a 1 percent change in interest rates, is another factor to consider. Research the risks of investment products and do your best to balance assets to minimize the effects of interest rate changes 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 mixes that tout guarantees of “risk-free” returns. Combining a guarantee with a certain amount of money you will earn – “this is a safe investment that will earn you $6000 every three months” – is a very effective tactic known as phantom fortunes. You can avoid fraud by only working with registered investment professionals – using FINRA BrokerCheck to see if a person is registered to sell securities – and by sticking to your pre-determined financial plan.
Investors who need short-term liquidity — for example, if you’re planning to make a big purchase soon or know that your education bill is due — are more likely to want to take a different path than investors who don’t need the cash right away. All other things being equal, the latter group may be better able to stomach fluctuations in the short term. But any investor who can’t stand the idea of - or can’t afford – losses in volatile times may want to explore less volatile alternatives to help secure the value of their portfolio.
Stock market fluctuations are beyond the control of any one investor. So take control of what you can, and focus on key investment concepts like staying diversified and rebalancing to stay aligned with your goals.
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