In the kind of environment the U.S. stock market has been in this year, it can be difficult for some investors to make sense of a sound strategy. Even though the financial markets are expected to net another positive year of returns, the ups and downs have been numerous and hard to predict. If you have significant assets invested in the stock market, read on for our tips on how to invest in a volatile market.
Don’t Get Impatient
Many investors get impatient in a volatile market. They think it’s best to sell when there’s a dip in performance, then may come to regret it later. Unlike professional traders, a regular investor can easily succumb to losses by selling too quickly or trying to outperform the market. Even if you’re planning to retire in five years, your focus should be on long-term gains, which means you should pay less attention to weekly or monthly gains or losses.
Another mistake investors make is checking account balances too often. It’s tempting, especially in a volatile market – you want to make sure your investment balance is growing, not shrinking. However, checking accounts too often can cause unnecessary anxiety.
Create and Stick to a Plan
Ideally, you’re already working with a financial advisor on your investment plan. Even if you’re going it alone, when you take the time to develop a balanced, sensible investment plan that makes sense for your risk tolerance and situation, stick to it. Avoid listening to the advice you see on television or putting too much stock on newspaper headlines. Both are designed to attract viewers and readers, respectively. And both respond to the daily ups and downs of the market – not the long game.
Part of a balanced portfolio is a mix of stocks, bonds, and money market accounts. Stocks are highest risk, of course, but often produce the highest return (in the long haul). Bonds are more stable but typically have lower returns, and money market accounts are essentially savings accounts with a small interest rate. The typical reaction for most people is to play it safe and be conservative. That can backfire easily, so avoid having too many assets in money market accounts or cash.
Secondly, although stocks do tend to produce the highest return, sometimes when stock prices plummet it might make sense to sell. Look at the other benefits of the stock you’re holding, like dividends. Even a temporarily low-performing stock could offer the benefits of compounding dividend payments. Look at what you have before making the decision to sell.
Finally, when you do sell stock, don’t be afraid to get back in the market. It helps to work with a licensed and experienced financial advisor when planning your long-term investment plan. Someone who understands the market performance and knows your situation can help you make decisions to weather the downturns and take advantage of opportunities during a market upswing. The professionals at NL Financial, a division of Naden/Lean, can help. Contact them today.