If you’re investing, you can probably agree that market volatility can be rough on your nerves. The ups and downs are sometimes so extreme that you begin to wonder whether or not you should even bother investing at all, instead of just leaving your money in the bank where it’s likely to earn next to nothing in interest over time (if you’re lucky). However, if you love the potential of achieving high returns through the stock market and plan to stay in it long-term, here are five things you can do right now to navigate effectively during market volatility without panicking or selling at the wrong time.
What is market volatility?
Over the last year, the stock market has experienced some massive volatility, with the Dow Jones Industrial Average losing 2,000 points one day and recovering all of that loss the next day. As you might imagine, this kind of volatility in financial markets has spilled over into other areas of our lives and affected not only individual people but also businesses as well. Some businesses have felt the effect more than others as they faced investors who are nervous about investing in anything at all because they don’t know how their portfolio will be affected by changes in the market.
It’s normal. It happens on a regular basis, and it’s inevitable. It can affect investors in any market at any time, so we can’t predict when it will occur. But when volatility does strike, there are a few things you can do to minimize its impact. You may even be able to use it as an opportunity for some quick profits.
As the markets continue to fluctuate and volatility rises, it can be difficult to know how to position your business in such an environment. Fortunately, there are several ways you can take advantage of today’s conditions, even if you aren’t 100% certain where the market will go next. To find out more about how to navigate during market volatility, keep reading below!
The psychology behind market volatility
For those who have been impacted by market volatility, it is important to remember that there are psychological factors at play. Everyone wants to believe they will be immune from an adverse financial event, but a large body of research confirms that loss aversion and anchoring significantly impact investor behavior. Put simply, we fear losses more than we desire gains. So if you lose $1 million (or 10 percent of your investment), that hurts more than gaining $1 million feels good.
A few actionable tips
- Review and discuss your investment objectives and make sure they’re still realistic.
- Consider rebalancing some of your assets, if necessary, to keep your risk profile in line with those objectives.
- Decide which markets you can stay invested in during periods of uncertainty; assets with different performance characteristics may be better than a complete market sell-off at that time.
- If you want help managing your portfolio through times of volatility, consider working with an advisor who has experience navigating volatile markets.
- Keep tabs on news headlines so you know when trends are changing and when it might be appropriate to take action—or not take action—based on what’s happening in financial markets.
Sometimes, the market can take wild swings, whether it’s up or down, left or right, it doesn’t matter — if you don’t pay attention to what’s going on in the market, you can get caught with your pants down (or shorts off) and not have time to adjust to the new information that’s available to you. It happens all the time to investors who are trying to make money by riding the waves of instability in the stock market.
