To keep volatility at bay, study the average market returns and history, the importance of asset diversification, and how to manage the expected anxieties that accompany market declines.
Be Proactive, Not Reactive
Set the stage early to cope with the inevitable market drops.
Understand that market volatility is expected any time and occurs periodically along with changes in the business cycle, global occurrences, and national economic events.
Set Up the Portfolio to Minimize Volatility
The knowledge of how each asset class has performed in the past is an important tool when setting up the initial portfolio. The proper setup helps to deal with market volatility over the long term. One of the most common mistakes investors make is not thinking holistically about their portfolio.
In other words, think of the big picture, not how each specific holding or account is performing.
When stock funds are soaring, a diversified portfolio won’t go up as much, but conversely, neither will it fall as low during a market correction.
Control the Mind; Control the Money
All the preparation won’t help if the investor panics at the first sign of market volatility. An advisor needs to be prepared for those phone calls after a big market drop to talk the client off the figurative ledge.
Many investors want to sell, after a big market decline and get out of the market altogether. The advisor must be prepared for some hand holding and refresher education.
Research studies show that investors' portfolios typically perform worse than the overall market due to mental money mistakes. If the investor jumps out of the market at the first sign of a decline, then he or she is selling at the bottom. The flip side of this behavior is when an investor gets swept up in market euphoria and buys back in as stocks trend toward their highs. This counterproductive trading activity causes the investor to buy at the highs and sells at the lows. The advisor's job is to make sure this doesn’t happen by being available for hand holding and education.
Trading too often yields sub par investment returns. Not only does buying and selling at inopportune times create lower returns, so does excessive trading which increases commissions and reduces profits.
Volatility Equals Opportunities
An often overlooked benefit of market volatility is the opportunity to invest additional funds during market dips. By keeping some cash on the sidelines, when the inevitable market decline occurs, you can invest money at bargain prices. Similar to buying on sale.
The Bottom Line
Remain in touch with your advisors during market ups and downs and tread with a combination of education and support.
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