The market certainly took us on a ride this month. An unsettling tailspin was followed by a week posting the biggest percentage gains of the year. Such news can tie a stomach in knots when your money is involved, even when you know market volatility is normal.
While there’s no perfect way to navigate market ups and downs, these practical tips can help:
Diversification Matters
Diversification is key to managing market volatility. By spreading investments across different asset classes, sectors, and regions, you can reduce risk. This strategy helps mitigate the impact of a downturn in any single investment or market segment, smoothing out returns and providing a buffer against market unpredictability. According to research, diversified portfolios can lower risk by up to 30% during volatile periods.
To diversify effectively, use asset allocation. This involves dividing your investments among various asset classes—such as stocks, bonds, and cash alternatives—in proportions that suit your risk tolerance, time horizon and financial goals (e.g., 70% in stocks, 20% in bonds, 10% in cash alternatives). Since different asset classes perform differently under various market conditions, spreading your investments helps reduce overall risk. Although diversification doesn’t eliminate market loss, it can balance declines in one asset type with gains in another.
Keep Your Balance
A balanced portfolio is crucial for managing long-term volatility. While it’s important to avoid overreacting to short-term market fluctuations, neglecting your investments during good times isn’t wise either. Review your portfolio at least once a year, and more often if the market is particularly volatile or if there are significant changes in your life. Rebalancing helps align your portfolio with your personal goals and can mitigate the impact of market shifts.
Regularly assessing and adjusting your portfolio ensures it remains in line with your long-term strategy, providing peace of mind and reinforcing your commitment to financial goals.
Maintain a Long-Term Perspective
Market fluctuations can be distracting, but keeping a long-term perspective is essential. Focus on your long-term goals, such as retirement or funding a child’s education, rather than daily market movements. Short-term volatility usually has little impact on long-term outcomes. By concentrating on your long-term objectives, you can better withstand the emotional ups and downs of market swings.
Avoid making drastic changes based on temporary market conditions. For example, shifting to conservative investments in response to negative returns can lock in losses and forfeit potential gains when the market recovers.
If you have any doubts about your investment strategy or concerns about the market, consult your advisor. We’re here to help you navigate these challenges.