Key Takeaways
- Stay calm — just because the market feels unstable doesn’t mean you should too.
- Don’t just think short term — consider your long term goals.
- If you must change, consider diversification.
Market volatility have you spooked? Uncertain about stocks when prices seem to alternate between historic highs and dramatic drops?
When things start looking shaky — and you start feeling anxious — stay calm. Don’t just abandon a rational plan in favor of emotional overreaction.
Here are some tips that may help manage expectations when markets start moving.
1. Understand what market volatility really is (and means)
It might sound scary, but “volatility” simply refers to a change in prices. It’s normal and happens over time — it’s not necessarily a cause for panic, and it’s something you should consider when developing your long-term strategy.
Think of it like weather: If we expect only sun, and base all our plans on that, we’re setting ourselves up for failure because there’s always a chance of rain.
Start by understanding that the prices of stocks and bonds will go up and down and there are some things you can do with that in mind. But even if market volatility catches you off guard, you can handle it. Here’s how.
2. Consider building a diversified portfolio
Diversification is a strategy that may help you with market volatility. The reason: Different kinds of investments can behave differently under similar conditions — they generally don’t all go up or down at the same time. The result can be less volatility in a diversified portfolio even when certain market segments go wild1.
To diversify, you would choose an appropriate mix of investments, not only across the major asset classes like stocks and bonds but also within them (large-company growth stocks or intermediate-term government bonds, for example). Generally, holding more stocks means taking on more risk, but what’s “appropriate” will be based on factors like:
- Your age.
- Your goals.
- Your time horizon (when you need to use the money you invest).
- Your emotional tolerance for risk.
3. Focus on time in the market (not market timing)
Long-term investing is more about time in the market than it is about timing the market.
That’s because no one knows exactly when’s the right time to buy or sell. Besides, research shows that investors who try to play Frogger — jump in and out to hit the open lanes and avoid getting run over — usually fare worse than those who contribute regularly and stay invested for the long run. Historically, the market’s biggest gains have come on a relative handful of days; if you’re not invested on those days, it’s very hard to make up for the missed opportunities.
That’s why it’s important to keep a long-term perspective. You invest to help secure the future you want — probably 10, 20 or even 40 years down the road. Even what feels like a big bump today will likely be a tiny radar blip decades from now.
Consider: If you own a home, and someone told you its value went down this year, would you panic and sell? Most likely, you will not. You bought your house because you knew you’d be there a while, so its day-to-day price isn’t as important. Chances are your home’s value will rise over time and that’s what you are focusing on.
Look ahead, not back.
4. Rebalance your portfolio
In order to maintain a properly diversified portfolio, you should consider rebalancing it. The reason: Since different parts of your portfolio behave in different ways, eventually your asset allocation will likely drift away from your original target2.
Let’s say you start with 80% stock funds and 20% bond funds. Then, over the next year, your equities’ (stocks’) value rises so much, they end up accounting for 85% or even 90% of your portfolio.
Not bad — but also more risk than your strategy called for. This is where rebalancing comes in: You might want to sell enough stocks (and/or buy enough bonds) to get back to your 80/20 target balance.
5. The right move could be nothing at all
It might sound counterintuitive, but during periods of market volatility, your right course of action might be to take no action. This is hard to do because volatility can leave you feeling vulnerable and concerned that you have to react.
Acting on emotion may lead to irrational decisions — and hard lessons. If you develop a sound, strategic plan and stick to it, you’ll likely be in a better position to pursue your financial goals.
What you can do next
Consider contributing regular amounts to your investment account consistently (even automatically) to take advantage of “dollar-cost averaging.” This means you buy more shares when prices are lower, fewer when they’re higher — and potentially lower your average cost per share. Routinely review your diversification strategy to ensure it still meets your situation, goals, time horizon and risk tolerance. Consider consulting a professional before you make a move.
1. Just remember that investing involves risk and it is possible to lose money. Asset allocation and diversification do not guarantee profit or protect against loss in declining markets.
2. Most financial professionals suggest reviewing your portfolio at least once a year to make sure it still meet your goals and risk tolerance.