The stock market has been a wild ride with the uncertainty of the COVID-19 pandemic, and periods of volatility can be a wake-up call to assess your portfolio. But investors who are focused on long-term goals shouldn’t let short-term movements sway their decisions. On the other hand, investors who are nearing or in retirement may need to add defensive assets for stability.
It’s important, especially in times of market volatility, to stay focused on your financial plan and make decisions based on your goals and timetable, as opposed to emotions or panic. Navigating through rocky markets can be tough, but following proven investing principles can help you stay the course.
Here are some principles to keep in mind:
1. Diversify your portfolio
Portfolios that are highly concentrated in just a few securities can be very risky. Having investments spread across different asset classes, such as stocks, bonds and cash, is important because each can respond to movements in the overall stock market differently. It’s not always the case, but when one is up, the other can be down. Having the right mix can help mitigate the impact of volatile markets.
Tip for investors: Ask yourself these questions:
— Does your portfolio’s success depend too heavily on the performance of any single investment?
— Are your holdings concentrated in a single industry, sector or country?
— Are you less diversified than you think because different funds in your portfolio hold many of the same securities?
2. Determine your risk profile
Investing involves taking risks, and you have to be honest about how much risk you’re willing to take with your money. Determining your risk tolerance informs how you should diversify your investment portfolio between stocks, bonds and cash. A larger allocation to stocks or funds that hold stocks can yield higher potential performance over the long term, but it also generally comes with higher potential risks.
Tip for investors: Do you need your portfolio to generate income now or in the near future? If your goals are short-term, consider lower risk. If your goals are longer-term, you have time to withstand and recover from volatility.
Another tip for investors: Can you tolerate fluctuations in the value of your investments, financially and emotionally? If not, you might want to consider a lower-risk portfolio regardless of your time horizon.
3. Take the long view
In times of severe market volatility, the fluctuations may feel disastrous. However, emotional reactions to short-term market conditions can put you at risk for further financial losses. Markets typically go up and down, and even bear markets historically have been relatively short. According to the Schwab Center for Financial Research, the longest bear market was a little less than three years (915 days), and it was followed by a nearly five-year bull run.
Tip for investors: Timing the market’s ups and downs is impossible – instead, stay diversified, know your risk tolerance and stick to your plan during tough times. For long-term investors, the strategy should be time in the market rather than timing the market.
4. For those nearing or in retirement, your approach to volatility may look different
If you’re nearing or in retirement, you likely want to tap at least some of your portfolio in the short term, so for that money you don’t have the luxury of time to recover from a market downturn. And that can be stressful. Having money needed in the short term allocated to more defensive investments can help stabilize those assets when stocks are slipping.
Tip for investors: If you expect to withdraw from your portfolio within the next four to five years, it’s a good idea to hold those funds in assets that are relatively liquid and historically have been less volatile than stocks, such as cash and short-term bonds. What you want to avoid, if possible, is being forced to sell more-volatile investments at a loss in order to fund short-term financial goals.
Market volatility can be a true test of an investor’s risk tolerance and ability to stay the course. A financial plan can help. If you don’t have a financial plan, now is a good time to create one to see you through different market environments now and in the future.
Investing involves risk including loss of principal. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
(Article written by Joe Vietri)