Investing in volatile markets

Periods of volatility, like the one we are in now, can often be a wake-up call for investors to make sure their portfolios are adequately diversified based on goals and risk tolerance.

While every investor is different, those who are focused on long-term goals shouldn’t let short-term movement sway their decisions, while investors who are nearing or in retirement may need to add defensive assets, such as cash or U.S. Treasury securities, for stability. No matter your situation, it’s important to stay true to your financial plan and make decisions based on your personal goals and timetable, regardless of market volatility.

Navigating through rocky markets can be tough, but following practiced and proven investing principles might help you stay the course. Here are a few to consider:

Diversify your portfolio. Portfolios that are highly concentrated in just a few securities can be very risky. Having money spread across different asset classes (or types of investments such as stocks, bonds and cash equivalents) is important because each can respond to the market differently. It’s not always the case, but when one is up, the others can be down. Deciding on the right mix can help cushion the blow during volatile markets.

Here are a few quick questions to ask yourself: Does your portfolio’s success depend too heavily on the performance of any single investment? Are your holdings especially concentrated on 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?

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 among stocks, bonds and cash equivalents. Higher potential rewards generally come from higher risks.

Start with some simple questions: Do you need your portfolio to generate income now or in the near future? Can you tolerate fluctuations in the value of your investments, financially and emotionally?

Take the long view. In times of dramatic market volatility, each fluctuation may seem disastrous. However, emotional reactions to short-term market conditions can put you at risk for further financial loss. 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. 

Timing the market’s ups and downs is nearly impossible – instead, focus on staying diversified, know your risk tolerance and stick to your plan during tough times. For long-term investors, which are most of us, the strategy should be time in the market rather than timing the market.

Remember to use periods of market volatility to make sure your investments are diversified and take your risk tolerance into account. Finally, if you don’t have a financial plan, now is a good time to create one.