Stock market volatility can be unsettling, but it doesn’t have to be something that you can’t handle.
The right tools and strategies can help you use volatility to your advantage instead of being at its mercy.
Here are five simple tips to help you better deal with stock market volatility in the future.
1) Resist the urge to sell
Getting nervous about rising stock market volatility? You’re not alone.
Consider that volatility can be a good thing if you know how to deal with it effectively.
By considering market volatility as an opportunity rather than a threat, investors can potentially reduce their portfolio’s exposure to risk without reducing returns.
In other words, investors may find themselves better off not selling.
As with all things in investing, patience is key when dealing with volatility—as long as you know how to manage your portfolio accordingly when needed.
Selling stocks when the market is down can make temporary losses permanent.
While staying the course can be emotionally difficult, it may be healthier for your portfolio.
2) Don’t invest the money you expect to need in the short-term
There are a lot of reasons why stock market volatility is so hard for most people to understand.
After all, we have been conditioned to view stocks as safe investments that always go up in value.
As a result, when volatility increases, as it often does during uncertain economic times or when there is an unexpected change in leadership, investors feel betrayed and don’t know how to react.
One thing they should not do is panic and sell their shares because that would be an impulsive reaction and one that’s likely to hurt their portfolio more than help it.
The trick is making sure you don’t invest any money you will need in the next five years (or sooner) because short-term volatility can be amplified in volatile markets such as those we experience today.
That includes your emergency fund, as well as cash you’ve set aside for near-term goals like a down payment on a home, renovation, or wedding.
3) Stick to your investment plan
Having a well-crafted investment plan in place makes it much easier to navigate any volatility.
If you’re diversified and focused on long-term goals, stock market volatility is less of a threat and more of an opportunity.
That’s because you can take advantage of dips in your investments as they happen by buying additional shares.
Stock market volatility means higher potential returns—you just have to be smart about taking advantage of them.
By pre-determining your asset allocation (and determining when it makes sense to change), you can avoid making emotional decisions about your investments when volatility occurs.
The longer you can invest in the market, the more time you have to accumulate your investment income and smooth out the effects of day-to-day market volatility.
4) Be realistic with your expectations
Excessive stock market volatility can sometimes be a scary thing, especially if you’re new to investing.
However, it doesn’t have to be.
If you’re careful with your expectations, you won’t experience any downside.
You may even take advantage of these price swings when they do happen.
The key is knowing how to deal with them to keep your investing strategy on track and free from unnecessary risk.
It’s easy to forget that annual returns have historically been close to 10%.
Bear markets (setbacks of 20% or more) have occurred on average every two to three years.
This means that it is unrealistic to expect your investments to continue to perform as they have for the past years.
5) Consider including defensive assets to protect you from stock market volatility
Consider including defensive assets such as gold and real estate, which tend to do well during periods of high market volatility.
The first thing that should come to mind when thinking about adding defensive assets is diversification.
Diversification involves spreading your investments across different asset classes, rather than investing all of your money in one area.
This protects you from risks that could harm individual asset classes like stocks or bonds.
Market losses are inevitable
The reality is that market losses are inevitable.
That doesn’t mean you should give up on your investment goals, but it does mean you need to prepare for losses and know how they affect your portfolio.
By understanding what causes market volatility, you can manage through rough patches with confidence.
Better yet, if you have a high tolerance for risk, taking advantage of periods of higher volatility may provide opportunities that help you achieve your goals even faster.
Markets move in cycles—upward trending and downward trending.
The general rule of thumb is that stocks tend to rise more often than they fall, so there will inevitably be times when your portfolio loses value (or appears to lose value).
Whether or not those losses turn out to be temporary or permanent depends on many factors—how long you hold onto those investments; whether their price has reached an unsustainable level; etc.—but one thing is certain: stock prices will always fluctuate.
That’s where diversification comes into play.
Stay calm during stock market volatility
When volatility strikes, many investors find themselves getting nervous and are prone to making rash decisions.
However, it’s important not to get rattled by short-term market fluctuations—after all, volatility is rarely permanent and there’s a good chance it will subside in due time.
We can already see some of that happening in recent days as stock prices have started trending higher again.
So while you may have initially been frustrated by your portfolio’s performance lately, try not to panic.
One month doesn’t define a bull market.
If you stick with your long-term plan and maintain a calm disposition during volatile periods like these, you should be able to recover from even tumultuous downturns relatively quickly.
Don’t react emotionally – stay rational!
This means no knee-jerk reactions!
Stocks go up, stocks go down – they always have and they always will.
Let them do their thing without panicking over every little bit of news; just keep yourself updated so that you aren’t blindsided if/when something major happens (e.g., a terrorist attack).