Volatility can be both unsettling and frightening. Yet it’s an inherent part of investing, and when used correctly can be a beneficial force.
While market volatility cannot be controlled, there are steps you can take to safeguard your investments from it. These strategies will help keep your long-term investment objectives in focus even during times of turbulence.
1. Diversify your portfolio
One of the best ways to protect your investments from market volatility is diversification. This strategy involves spreading your money across various assets like stocks, bonds and cash.
Asset-specific risks, such as stock fluctuations in a company, can also be reduced. Furthermore, investing helps smooth out returns since certain assets perform better during certain economic cycles than others.
Diversification can also assist you in reaching long-term objectives, such as retirement. It provides greater peace of mind since you won’t be solely reliant on one investment for the success of your portfolio.
2. Rebalance your portfolio
Rebalancing your portfolio is a critical element in protecting your investments from market volatility. You may have created your asset allocation based on goals, time horizon and risk tolerance; however, as markets fluctuate up and down, you must rebalance to maintain the original investment strategy.
You can achieve this by either selling high-performing assets to purchase lower-performing ones, or investing new money into underweighted asset classes. The most suitable approach for you will depend on your individual financial situation.
One common rebalancing strategy involves selling stocks that have lost value and investing the proceeds in bonds. While this can be an advantageous move, be sure to comprehend any tax repercussions before making changes. Ideally, rebalancing should take place at least annually for maximum benefits.
3. Create a financial plan
A financial plan is an indispensable tool for reaching your financial goals and objectives. Not only does it reduce stress, but it can also help you save for the future and build a sufficient nest egg to retire on.
A sound financial plan takes into account your individual situation, objectives and risk tolerance. It also assists in selecting the appropriate investments to meet those needs and goals.
No matter your investment time frame, it is essential to ensure your portfolio is diverse across asset classes. Doing this helps reduce exposure to risk if volatility persists and allows you to meet long-term objectives.
4. Don’t panic
With an investment plan designed to help you meet your financial goals, having the confidence and courage to ride out market volatility should come naturally. Even so, it’s not uncommon for investors to feel nervous during times of increased uncertainty – even those who have a long-term strategy in place.
It’s essential to remember that even major swings today will likely only make a minor ripple in decades’ time, so it is best to remain focused on your financial plan and keep emotions at bay.
Market volatility is an inevitable part of investing, so it’s understandable for investors to feel anxious or frustrated during these periods. Nonetheless, markets have experienced bouts of volatility throughout history and have not lost double digits in any rolling 15 year period since 1928.
5. Talk to your financial professional
Volatile markets can cause fear and anxiety, particularly for those with long-term investment plans. To mitigate the impact of volatile markets, try keeping emotion out of your investments, avoid market timing and work with a financial professional for advice. Volatile markets can be intimidating; take the emotion out of investing and avoid market timing altogether for peace of mind in times of trouble.
Diversifying your portfolio is one of the best ways to reduce volatility. While it won’t guarantee a profit, over time it may reduce the impact of market swings.
A financial professional can assess your investment objectives, risk tolerance and personal circumstances to guarantee that your assets are in line with those goals. This is especially relevant if you plan to save for retirement or college tuition expenses.