There’s no doubt about it: the ups and downs of the stock market can be most unsettling for investors. During times of exceptional turbulence, each day can feel a bit like riding a roller coaster… at 65 miles per hour without a seatbelt.
While some twists and turns can feel particularly sharp, the reality is that there is always risk associated with investing – no matter your timing or strategy. But there are measures you can take as an investor to steady yourself through periods of unsettling market volatility.
Have a plan and stick to it…
A well-crafted plan, that’s tailored to your specific timeline and objectives, helps protect you from making ill-advised transactions at inopportune times, including selling based on fear during sharp downturns as well as being seduced into taking excessive risks during strong advances. What’s more, if you’re operating from a clear plan and strategy that you can adhere to in varying market environments, one that can sustain itself in downturns due to having adequate safeguards, you will likely be less compelled to make impetuous decisions that can compromise returns.
But just having a plan is not enough. You must be prepared to stick with it through thick and thin, despite the vagaries of market conditions. Turbulent markets can give rise to turbulent feelings. That’s why successful investing requires both financial and emotional capital.
Your investments need to be appropriately positioned as you move through any type of market environment, like having high-quality assets, appropriate diversification, suitable balance, and adequate liquidity. This way,you’re poised to take advantage of opportunities as they come. That’s the financial capital. The emotional capital is discipline. To be a savvy investor, you cannot let emotions cloud important decisions, nor let fear or excitement prevent you from staying the course.
…But monitor and adjust
As important as it is to maintain a thoughtful plan, investing is a dynamic process, particularly if you’re an investor with a complex financial life. Set up a schedule with your adviser to regularly review your financial and investment programs outside of market turbulence, so you don’t feel forced to make untoward decisions when conditions get rough. Like most things in life, well thought out decisions that are implemented in a disciplined fashion usually yield successful outcomes.
Tumultuous markets also bring risk into perspective. In upward-moving markets, it’s easy to get lulled into complacency and satisfaction. Bear markets serve as gut checks, motivating one to assess and confirm whether our investment risk profile is appropriate or needs adjustment.
Look for silver linings
For the prepared investor, market volatility can provide excellent opportunities. The most obvious is the chance to buy high quality assets at compelling valuations during downturns. Importantly, this can result in portfolios being upgraded in quality in ways that can be rewarding for years to come. What’s more, if you have a long runway before retirement (say, 10 years or more), these types of markets can be a gift – providing the opportunity to fund college education plans for children or grandchildren, augmenting your retirement plans, or making individual investments. Low interest rates can also be useful if you’re looking to buy a home, business, or other long-term assets, and can provide favorable wealth transfer options if that’s on your radar.
The adage of ‘buy low and sell high’ seems so simple; however sometimes emotions get in the way of investment success. It’s natural to feel nervous when the market spirals downward. But it’s important to maintain perspective. Downturns occur on a regular basis. While we can have our opinions on how markets might trend, the fact is that we are always operating with a level of uncertainty.
The reality is this: investing is a long and winding ride. In my experience, investors who design clear and understandable investment plans, resulting in portfolios built toward meeting specific near and longer-term objectives, can withstand the inevitable bumps along the way and prosper nicely over time.