The word volatile can make anybody nervous. Especially when your money is involved. But it’s common for the stock market to fluctuate by nature. If you notice the volatility nearing bear market potential (i.e., a market with a prolonged drop in investment prices), you may want to rethink your investment strategies. Keep reading to learn what the best plan of action may be. Every investor is different, and depending on your financial situation, you might not need to do anything.
What Is A Volatile Stock Market?
When someone says, “the market is volatile,” what exactly do they mean? Volatility is the rate at which the price of a stock increases or decreases over a particular period. Therefore, the higher the stock price volatility, the higher the risk for the investor. Monitoring volatility helps investors estimate the market fluctuations that happen over time.
How To Handle Long-Term Investments
Long-term investments are great for long-term goals like retirement and can help secure your financial future. This is an approach to investing rather than an actual asset class. Investors seek long-term gains despite any potential short-term volatility. A long-term investment is one that you hold for at least a year and pay long-term capital gains taxes upon sale. That said, the exact time range of a long-term investment varies for each investor.
Market conditions are frequently referred to as either “bear” or “bull.” A bear market is when stock prices decrease, stock prospects are gloomy and investors look for other alternatives. It’s the opposite of a bull market, in which stock prices are on the rise. According to Hartford Funds, the average length of a bear market is less than ten months, so you might not need to make any changes at all. Bull markets, on the other hand, can last around three years to a decade.
Here are some tips for approaching long-term investments during a volatile market:
- Have a diverse portfolio: It’s essential for investors to have a mix of different assets in their portfolio to avoid taking on too much risk. For example, if 100% of your funds are invested in stocks, you might consider investing in real estate, commodities, bonds, or other asset classes.
- Consider low-risk investments as well: Just in case the market starts to go back up, you might want to hold onto some of the wealth you’ve already accumulated. Low-risk assets like government bonds and Treasury securities are safe bets that typically offer a low return but won’t go negative.
- Rebalance your portfolio when needed: Market fluctuations can affect your investments to a place where they no longer align with your financial goals. In a perfect world, you should rebalance your portfolio annually or every quarter. Most brokers offer this as a service.
- Keep investing: If you feel uncertain, you may want to cut back on your investment contributions. The market will start to see consistent gains at some point, and you’ll benefit from investing when prices are low.
How To Handle Short-Term Investments
If short-term investments are your game plan, an increase in market volatility could significantly affect your future. You might only have a short-term investment for a few months to a few years. For example, maybe retirement is right around the corner, or you’re investing in a brokerage account with no intent to use that money for other short-term financial goals. Here are some tips and tactics for approaching short-term investments during a volatile market.
- Don’t try to time the market: Price swings can be very tempting to take advantage of if you want to secure short-term gains. But it can be challenging when the market is more volatile. You could end up with greater losses instead.
- Keep your portfolio diverse: Similar to long-term investments, it is essential for short-term investors to also have a diverse portfolio to avoid taking on too much risk. Review your current portfolio and look for any minor adjustments you can make to add different asset classes and stock sectors.
- Invest in assets that perform well during times of increased volatility: Some stocks and asset classes can perform better when the market isn’t doing so hot. Investing in things like real estate or precious metals could potentially help counteract any losses you may experience during times of economic stress.
- Keep on investing: Dollar-cost averaging is when you invest equal amounts of money during a set time frame, regardless of any market fluctuations. You should do this if you’re able. It’s a common tactic for many investors, allowing you to purchase more shares when prices are low. Plus, it can reduce the average cost per share overall.
- Consider cashing out some of your investments: If you’re stressed about possible economic issues affecting the stock market, it could be a good idea to cash out some of your portfolio. Don’t make this decision on anxiety alone, though. If you back out of an investment at the wrong time, you could lose out on potential gains if you hadn’t sold in the first place.
- Protect your capital: Especially if you’re investing for retirement or are planning to leave the workforce within the next few years. In that case, it may make sense to move your holdings to safer investments to avoid any big losses. As an older investor, you won’t have the luxury of time to recuperate losses as younger investors do.
Should You Make Changes To Your Portfolio During A Volatile Market?
Increased volatility in the market could be the right time for you to make changes in your investment strategy. It all depends on your current financial situation and goals. Consider what you’re investing in (and for), whether it be retirement or short-term gains, and decide based on what you need the most. And no matter what, don’t make a rash decision if you’re panicking about the market. Avoid selling and timing the market because you might regret that choice later.
Consult With An Investment Professional
If you’re unsure about making changes during a volatile market, it might be the perfect time to talk with an investment professional. Arizona Central Credit Union’s Investment Services Team can guide you through what’s happening in the market and align your investments with your financial goals. Contact one of our experienced investment professionals at 602-523-8408 for a no-cost, no-obligation meeting.
