By Josh Nelson, Wealth Advisor
Many investors are familiar with the emotional impact that often comes with market volatility. When stock markets swing in extreme directions or change suddenly, investors can feel anxious and make decisions based on emotion that can hurt their pocket. This is a natural reaction when the markets are volatile, especially when the future seems uncertain and negative news headlines are abundant.
Instead of panicking and immediately changing your investment strategy, it’s important to keep perspective and maintain your focus on the long-term, no matter how rocky the markets may become. When stock market volatility strikes, we recommend these five strategies to help you maintain smooth sailing.
1. Don’t Panic and Maintain Your Original Investment Strategy
Investing in the stock markets can produce a variety of emotions for any investor. When all you hear on the news is doom and gloom, the best thing you can do is work with your financial advisor and trust in the plan you created together. Also, remind yourself of investment statistics to keep emotions in check. For example, long-term investments can produce solid returns over 20–30 year periods, despite experiencing market volatility during that time frame.
2. Keep an Active Approach When It Comes to Risk Management
Depending on age, personality, short-term, and long-term financial goals, each investor has their own risk tolerance. Whether you have a high or low risk tolerance, be sure to maintain an active approach. If you become uncomfortable with your strategy, risk tolerance assessment, or investment portfolio, discuss that with your financial advisor before making any rash decisions.
3. Have an Investment Policy Statement
If you want to stay on track with your investments, regardless of what the markets are doing, you should have an Investment Policy Statement (IPS). An IPS is a document drafted between you and your financial advisor that outlines general rules for meeting your investment objectives. It includes criteria for monitoring performance, addressing risk, and communication between you and your advisor. Your IPS should also include a provision explaining when you should rebalance your portfolio.
If you don’t have an IPS, you could be leaving your investments to speculation. Without written objectives and guidelines, your investments are subject to the whims of your emotions, and how you “feel” you should be investing.
4. Maintain a Diversified Portfolio
Do you want to have a proven cushion that can help protect you when markets take dramatic swings? Work with your financial advisor to create and maintain a diversified portfolio. A properly diversified portfolio should include a variety of large, mid, and small cap investments, both domestic and foreign. It should also have a variety of industries and investment styles.
5. Don’t Rely on the Financial Media
When emotions are running high, it is easy to get sucked into the financial media’s message of doom and gloom, with so-called “experts” inciting fear and panic. Remember, no one has a crystal ball when it comes to the future of the markets, and even scrutinizing past events cannot fully dictate the market’s future. Reach out to your financial advisor, calmly review your current strategy, and don’t focus too much on stock market news.
Traditionally, most financial advisors tell you to hold onto your investments when market volatility hits, rather than adjusting your strategy. Historically, investors who stay the course and disregard market volatility typically reap the returns later on. That said, each investor needs a personalized investment strategy, so it may be best to discuss everything fully with a financial advisor.
If you’re concerned about recent volatility and have not heard from your current advisor, contact us to schedule a complimentary second opinion. We can review your current investment strategy, portfolio, risk tolerance, and Investment Policy Statement and decide if any changes are necessary. We’re here to help.
By Lynnette Khalfani-Cox
A diversified portfolio does not assure a profit or protect against loss in a declining market.