Dealing with Volatility
We have all been there, watching the markets fluctuate up and down, feeling the excitement on the upside and the fear on the down side. It can be difficult to continue to invest with confidence when markets are volatile. However, it is important to keep market volatility in perspective and not let short term market swings cloud your thinking or cause you to make changes that affect your long term investment objectives. Staying focused on the long term, being methodical, and sticking to your investment discipline can help you come out ahead in the long run.
It’s important to understand that volatility is always going to be part of the markets; however the amount of volatility you experience as an investor can be controlled by the asset allocation of your account. Asset allocation is the process of dividing investments in your portfolio among different types of assets such as stocks, bonds, real estate, commodities and cash, in order to meet a specific objective.
Typically the more stock an investor has in their investment portfolio the more volatile it will be. Try not to be discouraged or scared on volatile days, weeks, or months, instead keep your long term goals in focus.
Sticking to a long term investment program is sometimes easier said than done, however over the long run stocks trend upward, even though there are periods of volatility that may make the ride bumpy along the way. When you find yourself in these periods you may even question your strategy. Doubt can creep in, and this can cause you to make short‑term changes that may deviate from the strategy you have in place to reach your long-term goals. It’s important to keep things in perspective, and often times you are better off not making any changes.
There are many ways to deal with volatile markets, but here are a few of the best practices we suggest when things get volatile.
- Stay diversified and review your asset allocation to be sure it is in line with your long term goals.
- Evaluate your risk tolerance periodically, and during times of volatility take the opportunity to observe how you are feeling. If you are nervous, consider reevaluating your risk tolerance.
- Take profits or cut losses where appropriate.
- Don’t sell during markets drops with the intent that you will buy again later when things are better.
- Try and use the volatility as an opportunity to buy investments that may be temporarily undervalued.
- Own high quality names in your portfolio that are more likely to weather difficult markets.
- One of my favorite pieces of advice is to tune out the noise of social media and TV. Refocus your attention on your long term investment goals.
The truth is there is no real secret to avoiding market volatility. It’s time IN the market not timing the market that generally leads to success. Keeping things in perspective, and remembering a few of the ideas above will help you weather the storms that you will inevitably encounter as an investor. We believe, and history has proven, that the best way to navigate a choppy market is to have a solid investment strategy and a well-diversified portfolio. In the long run, it’s this disciplined investment approach that helps us reach our long-term goals.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Diversification does not guarantee profit or protect against loss in declining markets. Past performance does not guarantee future results.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.