Here Are Ten Strategies to Help Prepare You Financially and Psychologically to Handle Market Volatility
1. Have a game plan
Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, many of our client portfolios employ a sailing and rowing strategy, which combines strategic and tactical asset allocation.
2. Know what you own and why you own it
When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold, regardless of what the overall market is doing.
3. Everything is relative
Most of the variance in the returns of different portfolios can generally be attributed to asset allocation. A diversified portfolio is no guarantee that you won't suffer losses, of course. But diversification means that just because the S&P 500 might have dropped 10% or 20% doesn't necessarily mean your overall portfolio is down by the same amount.
4. This too shall pass
The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. A well-thought-out asset allocation is still the basis of good investment planning.
5. Learn from mistakes
Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best aren't right all the time. Sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions.
6. Continue to save
Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, your bottom-line number might not be quite so discouraging.
7. Cash is your friend
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you've established an appropriate asset allocation, you should have resources on hand to prevent having to sell securities to meet ordinary expenses.
8. Remember your road map
Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others.
9. Look in the rear-view mirror
If you're investing long-term, sometimes it helps to take a look back and see how far you've come. If your portfolio is down this year, it can be easy to forget any progress you may already have made over the years.
10. Take it easy
If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class into another. You could put any new money into investments you feel are well-positioned for the future but leave the rest as is. Even if you need or want to adjust your portfolio during a period of turmoil, those changes probably should happen in gradual steps.
adapted from Forefield, Inc.