Back to Basics: 5 Steps for Weathering Volatility
Shake-ups in the banking sector, rising interest rates, inflation and global geopolitical concerns have all contributed to ongoing uncertainty in the domestic and global markets in recent months. When it comes to managing uncertainty and the emotional responses it can evoke, getting back to basics can help calm investors’ nerves and inspire confidence during periods of increased volatility.
Below are five tips for weathering market fluctuations as you seek to remain on track toward your goals in any economic climate:
1. Maintain a long-term perspective
Investing involves risk which is why it’s important to identify and document each of your investment goals and the time frame you hope to achieve them. Because investment values fluctuate over time, it’s generally not appropriate to invest money you will need to pay for short-term goals, such as a vacation you plan to take this year. Investing is most appropriate for longer-term goals, typically with a time horizon of 3 - 5 years or more. When you invest for the long-term, day-to-day market fluctuations become less of a concern, as long as your portfolio is appropriately allocated, diversified and aligned with your goals.
2. Understand your tolerance for risk
Often, investors think they could tolerate a market drop of 10%, 15% or 20%—until it actually happens. As we witnessed in March 2020, a sudden, large drop in market value led many investors to react emotionally and move to cash as share prices were falling. Not only does this result in locking in losses, but many investors wait until prices are rising again to buy back into the markets—potentially costing them even more.
Avoiding reactive or emotional decisions begins with understanding your tolerance for risk. The goal is to make sure that the risk-adjusted returns you seek are fully aligned with your goals and investment time frame. If large market swings make you nervous, it may be time to re-evaluate how much risk you are actually comfortable with as you pursue specific financial goals.
One of the first principles of investing is "don’t put all of your eggs in one basket.” It’s important to spread your assets across a wide variety of asset classes and investment types, such as stocks, bonds and cash to achieve diversification. Investing in different asset classes can help manage the risk an investor may be exposed to if they were solely invested in stocks or bonds.
However, simply investing in several different funds or asset classes doesn’t necessarily constitute a well-diversified portfolio. A well-diversified portfolio also considers the correlation between markets and individual asset classes to help manage risk. For example, the stock and bond markets tend to move in opposite directions, so when stock prices fall, bond prices rise. It’s also important to diversify your assets across investment subcategories, such as small and large company stocks, U.S. and international equities, short and long-term bonds, and international and domestic bonds. Additional investment considerations may include real estate and other alternative investments, based on your specific investment goals, time frame and risk tolerance.
4. Follow a disciplined approach
There’s no question that remaining focused on your long-term goals can be difficult during periods of uncertainty. That’s where a disciplined investment strategy can help. Adhering to a well-thought-out strategy that is aligned with your personal goals, risk tolerance and time frame can help you avoid behaviors that can undermine your efforts, such as chasing returns or trying to time the markets. Adhering to a disciplined investment process that includes regular portfolio rebalancing can go a long way toward helping you pursue the risk-adjusted returns you seek.
5. Check in periodically with your financial professional
Following a disciplined strategy and meeting regularly with your financial professional are important ways to help you stay on course toward your goals. It’s also important to schedule time to talk whenever you experience a major change in your life, such as a job change, birth of a child, or when you’re approaching a milestone event, such as retirement. Working together to adjust and refine your strategy over time as your life and market conditions change can help inspire confidence along the path to your goals.
If you want to talk about your strategies for weathering change in any investment climate, call the office to schedule time to talk.
This information was written by KRW Creative Concepts, a non-affiliate of the Broker/Dealer.
This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
Financial Watch | April 2023
April 20, 2023