Volatile markets are simply unavoidable. However, that doesn’t mean they aren’t stressful, especially for new investors. In this blog, La Ferla Group will discuss a few ways to take the emotion out of investing to remain calm during periods of market volatility.
5 Methods for Coping with Market Volatility
1. Understand the Market
Having a firm understanding of why the market fluctuates is crucial to staying levelheaded during economic uncertainty. Common causes of market volatility include:
- Political developments, such as new regulations introduced by the government
- Economic indicators, such as inflation data and GDP calculations
- Public relations developments
- Global disorder, such as wars and political upheaval
In other words, market volatility is beyond investors’ control. It is simply a reality we must deal with. However, even a brief look at historical market data reveals a consistent upward trend, despite periods of downturn. Understand that the market will rebound.
2. Avoid Acting Impulsively
The impulse to sell off investments when the market starts trending downward is completely rational. Panic sets in, and you want to avoid capital losses.
Again, remember that the market will rebound. As a result, experts actually often (but not always) recommend investing more during a market dip, because it provides an opportunity to make significant capital gains when the market levels out.
3. Create a Rainy Day Fund
An emergency fund, or “rainy day” fund, can provide peace of mind during periods of market volatility. Consider saving a few months of expenses in an account that is not directly subject to volatility, like a savings account in a bank.
You will feel more comfortable knowing you have this fund to rely on.
4. Allocate Assets Properly
This involves a well-diversified portfolio that combines the right mixture of high-risk, medium-risk and low-risk investments to effectively balance risk and reward.
It’s a wise idea to speak with your Certified Financial Planner™ professional to develop an asset allocation strategy that works for you, especially because that strategy may change as you approach retirement or set new financial goals.
5. Solidify your Plan
Investors that have a comprehensive financial plan tend to be much more comfortable during periods of market volatility. A proper financial strategy takes into account that markets will undergo downturns and prepare accordingly.
Investors that panic during downward market trends should consider contacting a Certified Financial Planner™ to make sure their financial plan is sustainable.
The most successful investors are able to wait out periods of decline as the markets return to equilibrium. Remain disciplined whether the market is trending upwards or downwards.