Even if you view market volatility as a normal occurrence, it can be tough to handle when it's your money at stake. Though there's no foolproof way to handle the ups and downs of the stock market, the following common sense tips can help.
Don't put all your eggs in one basket
Diversifying your investment portfolio is one of the key ways you can handle market volatility. Because asset classes typically perform differently under different market conditions, spreading your assets across a variety of different investments such as stocks, bonds, and cash equivalents can help reduce your overall risk. One way to diversify your portfolio is through asset allocation. Asset allocation involves identifying the asset classes that are appropriate for you, based on your investment objectives, risk tolerance level, and investment time horizon, and allocating a certain percentage of your investment dollars to each class.
Focus on the forest, not on the trees
Don’t become too focused on day-to-day returns. Instead, keep your eyes on your long-term investing goals and your overall portfolio. Only you can decide how much investment risk you can handle – if you still have years to invest, don't overestimate the effect of short-term price fluctuations on your portfolio.
Look before you leap
When the market goes down and investment losses pile up, you may be tempted to pull out of the stock market altogether and look for less volatile investments. But before you leap into a different investment strategy, make sure you're doing it for the right reasons. How you choose to invest your money should be consistent with your goals and time horizon.
Look for the silver lining
The silver lining of a down market is the opportunity you have to buy shares of stock at lower prices. One of the ways you can do this is by using dollar cost averaging. With dollar cost averaging, you don't try to "time the market" by buying shares at the moment when the price is lowest. In fact, you don't worry about price at all. Instead, you invest money at regular intervals over time. When the price is higher, your investment dollars buy fewer shares of stock, but when the price is lower, the same dollar amount will buy you more shares. Although dollar cost averaging can't guarantee you a profit or a loss, a regular fixed dollar investment may result in a lower average price per share over time, assuming you invest through all types of markets.
Don't count your chickens before they hatch
As the market recovers from a down cycle, elation quickly sets in. If the upswing lasts long enough, it's easy to believe that investing in the stock market is a sure thing. But, of course, it never is. As many investors have learned the hard way, becoming overly optimistic about investing during the good times can be as detrimental as worrying too much during the bad times. The right approach during all kinds of markets is to be realistic - have a plan, stick with it, and strike a comfortable balance between risk and return.
Don't stick your head in the sand
Check up on your portfolio at least once a year, and even more frequently if the market is particularly volatile or when there have been significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance. If you need help, a financial professional can help you decide which investment options are right for you.
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by Vanessa Levan
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