As an investor, the last thing you want to worry about is volatility in the stock market. However, market volatility is impossible to avoid if you have money invested for the long term, such as in your 401(k). Here’s what to do when your investment account balance goes up and down.
Understanding market volatility
Market volatility is the rise and/or fall of the value of investments in a sustained period of time. It can apply to individual investments, like stocks or bonds, or to the entire stock market, such as the S&P 500. If you have money invested and you experience market volatility, it’s best not to panic.
Volatility isn’t always a bad thing. The negative impact of market volatility can generally be lessened with more conservative investing strategies. Here you watch and wait, such as with your retirement portfolio, and anticipate steady returns over time. The positive impact of market volatility can generally be more financially beneficial right away when applied to more aggressive investing strategies.
Managing market volatility
It may be difficult to watch the value of your investment accounts fluctuate during a time of uncertainty. The first reaction of many investors to stop the fluctuation in their portfolios is to sell off investments and liquidate them for cash. However, that’s not always the best decision. Take a moment to consider these four tactics before you make major changes in your investment portfolio:
Review the history of stock market volatility — The stock market has experienced volatility since its creation in 1817. Through the years, there have been times of crisis, including events such as the Great Depression in the 1930s and the Great Recession of 2008. Even with extreme fluctuations in the market, the market eventually rebounds to experience overall growth.
Avoid trying to time the market — During times of volatility, the market changes very quickly. If you’re not a seasoned investor, it’s best not to try to time the market’s next swing with selling and buying investments. Remember, you have not incurred any gain or loss on your investments until you sell them.
Continue to invest — Keep contributing to your investment accounts (e.g., 401(k) or other employer-sponsored plans) during the good and bad times. By continuing to invest a set amount regularly, regardless of the volatility in the market, you are implementing the concept of dollar cost averaging which allows you to reduce the overall price that you paid for the investments.
Maintain a diversified portfolio — Stay focused on your overall investment goals and your investment strategy to help accomplish those goals. In other words, know what you’re investing for. If you have properly diversified your investments based on your risk tolerance, the overall impact of market volatility could improve your portfolio. If you need help setting basic financial goals, your Credit Union can help you with no-cost Financial Counseling.
If you have concerns about your investments or think changes need to be made based on your risk tolerance, consult with or learn how to find a financial advisor.
The advice provided is for informational purposes only. Contact a financial advisor for additional guidance.