7 Strategies for Success in Volatile Markets
By the Inspired Investor teamFebruary 14, 2022
Selling may be your gut reaction when portfolio values drops. This is what you should do instead.
While your investing experience may be nowhere near the drama you’ve seen play out in big-screen financial thrillers, you’ve likely faced your own heart-sinking moments when markets are volatile.
You’re not alone. Intermittent stock market volatility – large and frequent price swings – is something most investors will experience throughout their investing journey. How you react when markets are volatile can make a significant difference in your ultimate investing success.
Here are seven points to consider when you hit rough seas.
- Avoid emotional decisions
- Don’t ‘time’ the market
- Remember downturns are normal
- Have the right growth strategy
- Take advantage of lower prices
- Remember volatility settles down
Avoid emotional decisions
Your impulse could be to bail on your investments when they’re down, but a decrease in value isn’t a great reason to make a sell decision. Instead, try seeing these feelings as an opportunity to re-evaluate the riskiness of your portfolio and remind yourself why you had the confidence to choose those investments in the first place.
Don’t ‘time’ the market
Some investors try to “time” the market – aiming to sell right before markets go down, then buying right before they go up again. Again, no one can accurately predict the ups and downs of markets, so this strategy rarely works. Investors still try, of course, which is why the average investor tends to underperform the broader market.
Downturns are normal
Stock market downturns are hard to watch, for sure. But remember this: While they’re unpredictable in the short term, they’ve stayed on an upward course in the long run. Downturns have happened before and will happen again. Historically, early January turbulence has had little bearing on what to expect for the year ahead. This year’s drawdown of 2.9 per cent is about in line with the average of 3.0 per cent. Any continued volatility in the days ahead shouldn’t be an immediate point of concern either – 2016 still saw the S&P 500 return 12.0 per cent despite an early drawdown of 8.9 per cent.
Have the right growth strategy
If you’re losing sleep or worrying excessively over volatile markets, it’s time to think about whether you’re taking on too much risk with your investments. An aggressive growth strategy is fine, but not if it comes with a side of mounting anxiety.
You can reduce the effects of market volatility by diversifying. This can mean cultivating a portfolio that mixes equities with bonds and cash, perhaps over multiple industry sectors and geographic markets. Diversification is a proven way to offset weaker performers with stronger performers, reducing volatility.
Take advantage of lower prices
You’d probably jump on a good sale on Black Friday — consider taking the same approach with your portfolio. When prices drop, some investors tend to sell. But when markets fall, good stocks can be dragged down along with bad. Look for ‘deals’ on high-quality stocks – you can scoop them up at a temporarily lower price and they will likely be among the first to bounce back. Or, if you’re in diversified portfolio, take advantage of lower prices by adding to your investments.
Remember volatility settles down
Markets may plunge in the short-term – due to inflation, interest rate fears or pandemics — but over the longer term, they’ve shown consistently that they tend to go up. Volatility smooths out, and the longer you have to invest, the more time you have to ride out the storms.
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