During the months of September and October, the stock market dealt investors more falling stocks than rising ones. Some may suggest the 2014 market has been worse than many years in recent memory. Although that remains to be seen, 2014 has been what I call a “year of fear.”
The year began with an extraordinarily cold winter, with places like Austin, Texas, getting snow and freezing rain, and the polar vortex crippling many parts of the Eastern Seaboard and the Midwest. Throughout the year, other events have affected stock market performance, including the Islamic State group, protests in Hong Kong, softening in German manufacturing figures, the spreading of the Ebola virus and the recent terrorist attack in Ottawa, Ontario. Because investors were inundated with so much information (and much of it was conflicting information), many investors did not know what to do, so they hit the panic button.
Although these events are undoubtedly reason to give us pause, if we look at the facts, we should be less concerned for our long-term investing success. Businesses have restructured and refocused on the bottom line, which often translates to better results for their shareholders. In addition, American energy production is at an all-time high, which has resulted in lower oil prices. While you are looking for positive signs in the stock market, here are three tips that may prevent your investments from getting hurt by recent fluctuations in the market.
1. Don’t be scared by market corrections. Market corrections are a necessary evil. Without them, we would create massive bubbles. These corrections typically help us keep our expectations realistic. However, it’s important to know the difference between a market correction and a bear market. I tell my clients that any softening of the market that is less than 10 percent is a correction.
When the market softens 20 percent or more, we are entering bear market territory, and it is likely time to make some changes to ensure they stay on course and reach their investment goals. We have to realize we have entered a new paradigm of investing — volatility is here to stay. Now that we know that, we have to figure out how to handle the volatility. Your portfolio should be diversified to protect against this volatility as much as possible.
2. Don’t let market lows give you portfolio woes. The market is a fickle beast. By its very definition, there will be both ups and downs in the market. However, two things are important to keep in mind should either market movement occur. First, you have to remember your plan and time horizon. You developed your investment plan when cooler heads prevailed, which is the best time to create it. Next, you have to realize that since fear is an inherent part of investing your hard-earned money in the stock market, the second thing you should do is take a risk tolerance questionnaire when the market falls.
These questionnaires are available on any number of websites, and they can help you put the market in context. Have you taken on more risk than you are comfortable with? If you get out of the market when it softens (and take the financial losses associated with it), by the time you decide the waters are safe enough to get back in, it may be too late.
3. Beta-test your portfolio to minimize your fears. Beta is a measure of a fund’s sensitivity to market movements, and is calculated by comparative analysis of how your portfolio will perform with respect to the Standard & Poor’s 500 index. Performing this kind of analysis can help to take some of the fear out of investing in the stock market. However, a low beta does not necessarily mean that low levels of volatility exist. It only suggests the market-related risk is relatively low.
For example, an investment in gold will often have a low beta, but despite the fluctuations that can happen in gold prices, the beta will remain low. However, beta can help you determine how much risk there is in your portfolio, and if that lines up with the level of risk you can tolerate.
Jacob Gold, Voya retirement coach, is a third generation financial advisor with Voya Financial Advisors Inc., a broker-dealer of Voya Financial. He is the author of “Financial Intelligence; Getting Back to Basics after an Economic Meltdown,” which was published in August 2009. Gold is a certified financial planner practitioner and Series 7, 24 and 66 securities registered.
Securities and Investment advisory services offered through Voya Financial Advisors, Inc., (member SIPC).
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3 Tips to Navigate Market Volatility originally appeared on usnews.com
