How to Invest Safely in a Volatile Market: Expert Tips & Strategies
Market volatility can occur as a result of economic downturns or geopolitical events. During these times, investors often make rash investment decisions that can hurt their returns.
Choosing an investment mix that aligns with your goals, timeframe, and risk tolerance can help you stay calm during volatile markets. But it’s important to understand that volatility can also create opportunities.
Expert Tips & Strategies for Investing Safely in a Volatile Market
While volatile markets are not uncommon, they can be anxiety-producing. Having a financial plan in place, re-examining your risk tolerance and maintaining a diversified portfolio can help you ride out the volatility.
Market volatility refers to the magnitude and speed of an asset’s price movements, whether up or down. As volatility increases, the chance of losing a portion or even all of your invested money increases as well. However, the volatility of a particular investment doesn’t necessarily mean that it isn’t a good long-term buy.
Traders may find that volatile markets increase the opportunity to make profits, since prices can move faster in a more volatile environment. This can present opportunities for short-term trading strategies, but increased volatility also makes risk control measures, such as stop losses, more important.
1. Stay Focused on Your Goals
Market volatility is not a reason to abandon your long-term investment goals or change your asset allocation. But it can create an opportunity to thoughtfully make adjustments that can help you remain on track toward your financial goals.
In times of volatility, it can be difficult to accurately determine a stock’s true value or the potential for substantial profits. Therefore, trading strategies that require greater accuracy when determining the timing of an exit or entry may be more effective.
One example is dollar-cost averaging, which involves investing a set amount at regular intervals (such as monthly) regardless of market conditions. This helps reduce the impact of short-term market fluctuations and prevents investors from making emotionally driven decisions.
2. Don’t Act on Emotions
While the ups and downs of market volatility can be unsettling, allowing your emotions to control your investment decisions is dangerous. Emotional trading and investing decisions can derail your financial plan and deprive you of the opportunities that may arise in a volatile market. This is one of the main reasons it’s so important to create a solid financial plan, which can serve as a guide during tough times.
A diversified portfolio that includes stocks, bonds and cash can help mitigate market volatility and protect your investments. During periods of high market volatility, consider buying bonds or U.S. Treasury bills, which have less exposure to market fluctuations.
In addition, reducing risk through diversification, appropriate asset allocation and dollar-cost averaging can help you stay focused on your long-term goals and avoid emotional trading decisions. Remember, market downturns are typically followed by strong gains. Trying to time the market can cause you to miss out on these strong gains, which could greatly diminish your overall returns over the long term.
3. Don’t Overreact
Market volatility can be unsettling and may cause you to make emotional trading decisions. This can derail your long-term investing goals and lead to costly mistakes.
Instead of panicking, remember that it is normal for markets to go up and down periodically, especially in volatile periods. Bouts of volatility are an integral part of long-term investing and you can expect to experience several declines during your lifetime.
Investors who take a disciplined approach to their investment strategy based on their risk tolerance, proper asset allocation and dollar-cost averaging can help to mitigate the impact of volatility. These strategies are designed to avoid the pitfalls of emotional trading and can be helpful in navigating turbulent markets.
In addition, many investors benefit from working with a financial advisor who brings expertise and perspective to their overall investing strategy. An objective partner can help you to maintain your perspective during volatile periods and ensure that your investment strategy is aligned with your financial goals. Your advisor can also help you to understand the underlying factors driving market volatility so that you can feel more confident during volatile times.
4. Keep a Cool Head
While the daily news flow can be a bit overwhelming, it’s important to remember that market volatility is a natural occurrence. Making rash decisions in the face of it can have a lasting impact on your ability to achieve your long-term goals.
For example, if you sell at a market peak, you may miss future gains and the chance to take advantage of a rebound. A well-thought-out asset allocation remains the foundation of a sound investing strategy, so it’s important to stick with your plans.
Some traders use a more opportunistic approach during volatile markets by placing smaller trades (committing less capital per transaction) and using wider stop-loss orders. This can help reduce the risk of being stopped out due to broader-than-normal intraday price swings and allow you to lock in profits faster.
Additionally, trading too often can result in higher fees over time, which can reduce your potential return on investment. Instead, consider focusing on trading opportunities within your own portfolio. For example, if your stocks have grown faster than your bonds or cash over the past few years, this might be a good time to rebalance and shift some assets into bond investments.
