Article
Coping With Market Volatility
Global market volatility ramped up last summer as worries about
the tenuous state of the Chinese economy shook virtually all major
financial benchmarks, indicating once again how interrelated the
world's economies and investment markets have become.
Widespread uncertainty has not only heightened
anxiety among investors, it was also a likely contributor to the
Federal Reserve's decision to leave interest rates near zero when
the Central Bank's decision-makers met in September. Indeed,
despite the continued strengthening of the U.S. economy, there are
many signs that indicate that this turbulent period for stocks may
linger indefinitely.
Five Investing Strategies for a Volatile Market
For long-term investors, dealing with volatile markets can be
taxing. Here are some points you may want to consider while riding
out the storm. None of these should be new to you, but they are
particularly important in a turbulent environment, which is where
their true value is realized.
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Don't panic -- When markets become volatile, the gut reaction
for most of us is to panic -- to buy when everyone else is buying
(and when prices are high) -- and panic sell on the downside (when
prices are depressed). Panic selling also runs the risk of missing
the market's best-performing days. Consider, for example, that
missing just the five top-performing days of the 20-year period
from July 1, 1995, through June 30, 2015, would have cost you
$21,780 based on an original investment of $10,000 in the S&P
500. Missing the top 20 days would have reduced your average annual
return from 9.79% to 3.58%.1
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Take advantage of asset allocation -- During volatile times,
riskier asset classes such as stocks tend to fluctuate more, while
lower-risk assets such as bonds or cash tend to be more stable. By
allocating your investments among these different asset classes,
you can help smooth out the short-term ups and downs.
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Diversify, diversify, diversify -- In addition to diversifying
your portfolio by asset class, you should also diversify by sector,
size (market cap), and style (e.g., growth versus value). Why?
Because different sectors, sizes, and styles take turns
outperforming one another. By diversifying your holdings according
to these parameters, you can potentially smooth out short-term
performance fluctuations and mitigate the impact of shifting
economic conditions on your portfolio.
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Keep a long-term perspective -- It is all too easy to get caught
up in the stock market's daily roller coaster ride -- especially
when markets turn choppy. This type of behavior is natural, but can
easily lead to bad decisions. History shows that holding stocks for
longer periods has resulted in a much lower chance of losing money.
For example, from January 1, 1926, through June 30, 2015, stocks
have never had a period of 20 years or longer where returns were
negative.1 The lesson here? Don't get caught up in
day-to-day or even week-to-week variations in stock movements in
either direction. Instead, focus on whether your long-term
performance objectives, i.e., your average returns over time, are
meeting your goals.
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Consult with a financial advisor. He or she can help you develop
a long-term investment strategy and can help you put short-term
events in perspective.
No one is certain what impact current drivers of
volatility will ultimately have on the economy and financial
markets. But as an investor, time may be your best ally. Consider
using it to your advantage by sticking to your plan and focusing on
the future.
1ChartSource®, Wealth Management Systems Inc. For the periods indicated. Stocks are represented by the total returns of Standard & Poor's Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. Copyright © 2015, Wealth Management Systems Inc. All rights reserved. Not responsible for any errors or omissions.