Here is your game plan for volatile markets. Follow the 4 steps and you will be able to handle market volatility:
1. Diversify
One way to lower risk in a volatile market is to diversify your portfolio. Invest in different sectors and in non-correlated asset classes. Just because one stock, one industry or even country is experiencing big swings, doesn’t mean every stock, industry or country is experiencing them. If your portfolio is diversified, you mitigate the highs and lows to ride out the storm.
2. Take advantage of cost averaging
You can reduce your risk of timing a lump-sum by leveraging cost averaging by investing a fixed amount on a regular basis. The result is that you end up buying into the market at different peaks and valleys. Over a longer period, cost averaging proves to deliver higher returns versus lump sum investing. You can set up automatic payments of a fixed amount to save time and simply forget about them.
3. Learn about economic cycles
If you learn about economic cycles, you’ll begin to see patterns. Financial markets will go up and down for months, and sometimes years at a time. But the one reassuring thing is markets tend to go up over a long period of time. Short-term fluctuations are part of the game.
4. Set dates to check your investments
One of the best ways to manage market volatility is by not looking at your investments every day. The more you follow your investments, the more likely you are to be influenced emotionally if they fluctuate. Schedule dates when you are allowed to review your investments (e.g. month end, quarter end or even only yearly). But don’t check your long-term investments every day. This will dramatically decrease the chances of you selling too early or buying too high.
Follow this game plan and you will weather the storms. They will come and always when you do not expect them. But it helps to sail confidently through the rough market waters ahead.
Sven Franssen