Seesawing markets are a fact of life.
The only certainties in life are death, taxes and market volatility. They don’t come at the same time or in the same magnitude every year, but come they will. We’ve gone from only eight 1 percent swings in the Dow Jones industrial average for all of last year to two of the biggest point declines in history this year already. Last year, many investors had little reason to think that investments go down and up, says Rich Guerrini, chief executive officer of PNC Investments. Investors probably aren’t thinking that anymore. To help get back in the swing of things, here are eight investing do’s and don’ts in an up-and-down market.
Don’t let emotions take over.
“First and foremost don’t panic when volatility arrives, because it will,” Guerrini says. Corrections are normal and to be expected. Frankly, they’re healthy because it gives people an opportunity to bring new money into the market, Guerrini says. When market waters get a little choppy, “don’t let your emotions take over and push you into immediate action,” says Marcy Keckler, vice president of financial advice strategy at Ameriprise Financial. A bad volatility-induced trade can be hard to recover from later on. “Less is more during volatile times,” adds Matt Hanson, senior wealth advisor at Kayne Anderson Rudnick.
Do have an emergency fund.
Keeping a portion of your savings in something liquid that isn’t subject to market movements can ward off panic when your investments go down. That fund should keep you from having to tap your investments in an emergency while the market declines, says Mark Travis, president and chief executive officer of Intrepid Capital Management in Jacksonville Beach, Florida. The size of your emergency fund will vary depending on your age and lifestyle. Young professionals with few dependents may need only three to six months worth of living expenses while retirees may want two years or more.
Don’t define risk as daily volatility.
If volatility makes you weak in the knees, your portfolio may be too risky. “Risk tolerance can change over time,” Keckler says. “Once you’ve experienced volatility, you may get a different sense of what you feel comfortable with.” To reduce volatility-induced anxiety, you could increase your bond holdings. Bonds ballast portfolios in turbulent markets, Travis says. But before deciding that a portfolio is too risky, reconsider how you define risk. “Don’t measure risk as day-to-day volatility,” says Justin Demko, UBS senior vice president of wealth management. A bigger risk is not achieving your long-term goals, something stocks, not bonds, are more likely to help you accomplish.
Do know the value of what you own.
“Not truly understanding the businesses behind stocks is what causes most investors to buy or sell at the worst times,” Travis says. If you don’t know the value of what you own, you can fall into the trap of letting the market — or the talking heads on the news — decide for you. Analyze each of your investments and determine their intrinsic value. This will enable you to decide for yourself if the market is fairly priced. “If you can’t explain the business model and why you own it to a fifth-grader, you probably don’t understand it well enough,” Travis says.
Don’t lock in losses.
There’s an inclination to sell when investments decline, but if anything you should do the opposite. Selling in a dip locks in your losses instead of giving that investment time to recover, Keckler says. And sell-offs are frequently followed by rebounds. Guerrini suggests viewing pullbacks as opportunities to buy investments that previously were overvalued — but only if the fundamentals agree. Just because a stock that was $100 is now $80 doesn’t mean it’s necessarily a good value, says Kate Warne, investment strategist at Edward Jones. The stock might not return to its previous high. Only if earnings and economic growth remain strong is a pullback a buying opportunity, she says.
Do get a portfolio checkup.
Volatility, like a backache, is a great reminder to have a checkup. During your portfolio checkup, re-evaluate your overall asset allocation “and how that correlates to your longer-term goals,” Hanson says. Is your portfolio allocation still where it should be? Pare back any investments that may have ballooned out of proportion, and use losses from other investments to offset the gains from those sales, Travis says. If you decide to sell some of your stock, Warne says not to do it in the middle of the downturn. Wait a few days to give yourself time to cool off and the market a chance to rebound.
Don’t abandon your plan.
A good financial plan is meant to survive a shaky market. “The reason you have a [financial] plan is to help you weather swings in the market in times like this,” Keckler says. “If you don’t have a plan, make one,” she says. “People who have a written plan with clearly identified goals are much more likely to feel financially confident about their future.” A financial plan will also keep you from acting on bad investing tips, which frequently arise during volatile and uncertain markets. Just because your cousin Joe says something is a buying opportunity, doesn’t mean it’s a good fit for your portfolio or your plan, Warne says.
Do diversify.
Diversification is one of the best volatility mitigators. Demko says to think beyond the classic equity-bond mix to alternatives like hedge funds, which “have shown they can manage the latter phases of the cycle more effectively than traditional assets.” Real estate, commodities and different areas of fixed income, like emerging market debt, also have a low correlation to the overall stock market, Hanson says. But “diversification is like wine,” Travis says. “A glass a day may be good, but that doesn’t mean a bottle a day is better.” It’s possible to over-diversify. For instance, studies show you only need 30 to 40 stocks “to virtually eliminate company-specific risk,” he says.
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8 Investing Do’s and Don’ts During Market Volatility originally appeared on usnews.com
