Market volatility is an inherent aspect of the financial landscape, and for investors, it can be both a challenge and an opportunity. In this blog post, we'll explore effective strategies to navigate market volatility, helping you make informed decisions and maintain stable investments even in uncertain times.
Understanding Market Volatility
Market volatility refers to the degree of variation in trading prices over time. While it can be unsettling, especially during economic uncertainties, it's crucial to approach market volatility with a strategic mindset rather than succumbing to fear.
According to Kiplinger, the US has had 12 recessions since the end of World War II, which averages to one every every 6.5 years. According to currentmarketvaluation.com, the average recession since 1950 has ended after 312 days, with the stock market down 1%. The average market bottom during a recession is after 169 days, with the S&P500 down 21%.
Key Insights:
Volatility is Inevitable: Volatility is a normal part of financial markets. It is driven by various factors, including economic indicators, geopolitical events, and investor sentiment.
Recessions are very common, but as long as one stays invested, things will return to status quo on average within a years timeframe.
Opportunity Amidst Challenges: While volatility introduces challenges, it also presents opportunities for strategic investors to buy assets at discounted prices.
Strategies to Follow During a Volatile Market or Market Correction
1. Diversification:
Diversifying your investment portfolio across different asset classes can help reduce your overall risk. By holding a mix of stocks, bonds, and other securities such as Alternative investments, you can mitigate the full impact of volatility on your overall portfolio.
2. Long-Term Perspective:
Adopting a long-term investment perspective allows you to weather short-term market fluctuations. Focus on your financial goals to help you avoid making impulsive emotional decisions because of short-term market movements.
3. Increase the amount you’re systematically saving
The best time to increase the amount you’re contributing to your retirement accounts per paycheck is when the market is in the middle of a correction, which is a sustained decline in value of 10%-20% from a recent peak. By doing so, you’re able to buy more shares of your investments at lower prices, which will improve your rate of return when the market returns to those recent highs.
4. Avoid Overreacting:
If watching the news or seeing your account values drop on a daily basis makes you worry, turn off the news and stop logging into your accounts online. Spend that time focusing on exercise or personal hobbies.
5. Regular Portfolio Reviews
Periodically review your investment portfolio at least annually with your financial advisor and discuss rebalancing with them. Realigning your asset allocation to your original targets can help maintain stability and optimize returns. Simply put, rebalancing is the action of selling an asset class or holding that has appreciated greatly to return their total percentage of your portfolio to the percentage that they were originally allocated. It then takes those proceeds and applies them to an asset class or holding that reflects a lower percentage of the portfolio than originally allocated. It’s the act of selling high and buying low, which is always a sound investment strategy.
Tips for Navigating Volatility
1. Emergency Fund Preparation:
Ensure you have an emergency fund in place to cover unexpected expenses, reducing the need to make hasty investment decisions during volatile times. Experts agree that it’s best to have 6 to 12 months of expenses in savings.
2. Professional Guidance:
It’s prudent to seek the advice from financial professionals, such as certified financial planners, who can provide valuable insights and help you make informed decisions tailored to your individual circumstances. They can also help you avoid making many of the common mistakes made during market volatility and market corrections.
3. Stay the Course:
The only action you should be taking is increasing the amount you’re systematically saving in your retirement and investment account and explore rebalancing with a financial professional.
While market volatility and market corrections can be unsettling, following these rules can help you stay on track to meeting your financial goals.
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