Market swings happen often and the main reasons for these fluctuations are political unrest, natural disasters, shooting oil prices, financial crisis and war situations globally. In recent years, Euro zone debt crisis and the United States fiscal indecision about debt, taxes and government spending have been a major cause of these market swings which affects the investment decision of an investor and can be unsettling for him. Many investors fear this frequent fluctuation and prefer to save their money instead of investing it in a volatile stock market.
The natural reaction to this fear instigate them to stop investing in a stock, thinking it will not cause further losses and keep their investment safe. But if you keep investing regularly over the years, you can benefit from volatile stock market trends. A disciplined and wise investor tends to do the same. He tries to maintain a diversified mix of investments and try to stay away from short-term adjustments. Moreover, stock market volatility reminds you to review your investments regularly and devise a strategy with exposure to different areas of the stock market, international stocks and investment bonds to reduce the risk of your portfolio. However, before investing in a volatile stock market, you should seek advice of Your Personal Financial Mentor in order to make effective investment decisions and safeguard your money.
Devise a Strategy
Having a tolerance for risk, making goals to minimize those risks and maximizes returns, and keeping in mind the time horizon to achieve your goals are the key factors that enable you to devise a suitable investment strategy. Tolerance for risk helps you broaden your financial situation, such as income, savings and debt and your perception toward these financial elements. Whereas, time horizon constitutes the period after which you start getting return from your investments. By keeping these factors in mind, you can decide whether you should follow a conservative approach, an aggressive approach, or somewhere in between.
Trust Your Investments
You should not be scared of the short-term fluctuations even if the time horizon is long enough to warrant your aggressive portfolio of stock and stock mutual funds. Stay calm and re-evaluate your portfolio if the balance fluctuation is too nerve-wracking for you. But don’t be too conservative especially if you do not need the money anytime soon. Be realistic about your expectations. For example, cover your cost with a low-cost scheme such as guaranteed income annuity rather than letting the volatile stock market performance dictate your income when you are about to retire. It will help you stick to your long term strategy.
A well diversified portfolio always protects you from the volatility and down market trends. Although it cannot eliminate your losses but it can help limit them. If the value of a stock or a diversified portfolio goes down due to frequent stock market fluctuation, it can shake the investor’s emotions and can deteriorate his trust, leading him to make short term decisions. But he should know that the market doesn’t remain the same forever and stock portfolios lift up again once the market starts rising again. Therefore, it is important to spread your investments to the core asset classes which consist of stock, bonds and short term investments. You can also add commodities and real estate investments in your portfolio to further minimize the risk as long as these investments are correlated with the core asset classes.
Do not Time the Market
If you keep investing in and out of the stock market, it can be costly and takes away the significant portion of your market gain that was tended to receive in a concentrated period. The best period to invest in the stock market is when there is an unnerving environment. Investors have to face the odds for a longer period in order to time the stock market fluctuations which make them allocate their stocks ahead of downturns and consequently, decrease their exposure just before the market rise up again.
Hands-off Approach to Investment
Consider investing in a target date fund, or a managed account, or an all in one fund to reduce the pressure of managing investments in a volatile stock market. These funds tend to diversify your portfolio and provide exposure to various investment styles with an additional benefit of a professional allocation of assets. Therefore, you should focus on devising and monitoring a sound investment plan instead of focusing on the stock market turmoil because it is your duty to stay on track during the market swings.
Categories: Stock Market