02/06/2018
Triggers for market volatility can come in many different shapes and sizes—policy uncertainty in Washington, Bejing, Federal Reserve comments, earnings reports and even geopolitical changes. Market swings can rattle even seasoned investors nerves. But volatility is part and parcel of investing. So put such uncertain times to good use as a motivator to help ensure your investment strategy aligns with your long-term goals, timeline and stomach for risk. Here six things to consider when you approach your thinking about investments….
1.Maintain perspective—downturns are normal and normally short lived Market downturns may be upsetting, but history shows that the U.S. stock market has been able to recover from declines and can still provide investors with positive long-term returns. In fact, over the past 35 years, the market has experienced an average drop of 14% from high to low during each calendar year, but still had a positive annual return more than 80% of the time. In 2015 and 2016, this general pattern played out. U.S. stocks experienced sharp drops in August 2015, when China devalued its currency; in January 2016, as oil prices dropped; in June of 2016, after the "Brexit" vote; and in the run–up to the 2016 U.S. presidential election. Still, during the 2-year period, the market was up close to 8% cumulatively.
2. Be comfortable with your investments
If you are nervous when the market goes down, you may not be in the right investments. Your time horizon, goals, and tolerance for risk are key factors in helping to ensure that you have an investing strategy that works for you. Even if your time horizon is long enough to warrant an aggressive portfolio, you have to be comfortable with the short-term ups and downs you'll encounter. If watching your balances fluctuate is too nerve-racking for you, think about reevaluating your investment mix to find one that feels right. But be wary of being too conservative, especially if you have a long time horizon, because strategies that are more conservative may not provide the growth potential you need to achieve your goals. Set realistic expectations too. That way, it may be easier to stick with your long-term investing strategy.
3. Do not try to heavily time the market
Attempting to move in and out of the market can be costly. Research studies from independent research firm Morningstar show that the decisions investors make about when to buy and sell funds cause those investors to perform worse than they would have had the investors simply bought and held the same funds. If you could avoid the bad days and invest during the good ones, it would be great—the problem is, it is impossible to consistently predict when those good and bad days will happen. And if you miss even a few of the best days, it can have a lingering effect on your portfolio
4. Invest regularly, take advantage of volatility
If you invest regularly over months, years, and decades, short-term downturns will not have much of an impact on your ultimate performance. Instead of trying to judge when to buy and sell based on market conditions, if you take a disciplined approach of making investments weekly, monthly, or quarterly, you will avoid the perils of market timing. If you keep investing through downturns, it won’t guarantee gains or that you will never experience a loss, but when prices do fall you may actually benefit in the long run. When the market drops, the prices of investments fall and your regular contributions allow you to buy a larger number of shares.
5. Take advantage of opportunities
There may be a few actions that you can take while the markets are down, to help put you in a better position for the long term. For instance, if you have investments you are looking to sell, a downturn may provide the opportunity for tax-loss harvesting—when you sell an investment and realize a loss. That could help your tax planning. On the buy side, take advantage of buying your favorite companies at a discount. Buy the dip.
6. Consider a hands-off approach
To help ease the pressure of managing investments in a volatile market, you may want to consider working with a professional that can manage your accounts for your longer-term goals such as retirement. These different approaches offer a range of different services and different costs but, depending on the specific option, may provide professional asset allocation, investment management, and help with tax management
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