When the market goes on one of its periodic roller-coaster rides, it is hard for the average investor to not feel a little unhinged—especially when market data is so easily accessible on your computer, smart phone, newspapers, magazines, radio, etc. No doubt, the market and its volatility is the hot topic everyone is talking about. However, if you want to stay sane, your best move is to put strategies in place that help you weather the market’s volatility both financially and psychologically. Here are Henssler Financial’s top 10 ways that should help you maintain your sanity and help you reach your long-term financial goals:
1. Have a plan.
A long-term strategy with predetermined guidelines for buying and selling can help prevent emotional decisions when the markets become turbulent. For example, if you set a target price for a stock, you will know in advance that when it drops to a certain level, then you will buy the stock, and when it has risen to a predetermined level, you will sell it and take the profits. Additionally, a well-diversified portfolio can help you balance your risk in advance. While diversification cannot ensure a gain, it should lessen your chances for a loss in a downturn. Some sectors profit during a recession and others perform better during a recovery. Diversification can allow you to gain exposure to those sectors in anticipation of the market’s fluctuations.
2. Know what you own and why you own it.
Knowing why you purchased a stock can help you impartially evaluate it regardless of what the overall market is doing. As a first step, we suggest setting minimum criteria for your holdings. When a stock’s ratings fall outside of your criteria, it is time to let it go. It is also important to know how an investment fits into your portfolio as a whole. If you know you like a certain stock, a lower price may signal a buying opportunity.
3. Remember that everything is relative.
Generally, returns of different portfolios are varied because they have different asset allocations. It can be helpful to compare your portfolio’s performance to a relative benchmark. Just because the S&P 500 dropped 10% does not mean your portfolio is down by 10% as well—especially if you hold more than just stocks. Many investors hold bonds or mutual funds that are modeled after different indices in their portfolios. If your stock holdings or mutual funds are performing in line with their appropriate benchmarks, you may begin to feel better about you decisions.
4. Tell yourself, “This too shall pass.”
We have heard everyone say, “This time it is different.” But, it is always different. What makes it the same is that markets are cyclical by nature. If you missed selling during a market peak or regret buying when the price was low, you may very likely get another chance. A volatile market is an inappropriate time to turn your portfolio inside out.
5. Learn from your mistakes.
When the markets are rolling high, everyone is smarter than the average bear. It’s the market’s rough patches that separate the savvy investor from the crowd. However, it is important to remember that even the best make mistakes. Sometimes your best strategy is to take a tax loss on a loser stock, and to learn from the experience. Applying what you have learned to future investment decisions can help you get better at making those decisions.
6. Consider playing defense with dividends.
In the 1990s, most investors paid little attention to dividends because so few stocks were paying them. It was all about capital gains then. However, dividends can help cushion the impact of price swings. According to Standard and Poor’s, dividend income has represented roughly one-third of the monthly total return on the S&P 500 since 1926, ranging from a high of 53% during the 1940s to a low of 14% in the 1990s, when investors focused on growth.
You may also consider looking at defensive sectors, such as, consumer staples or utilities. Nevertheless, these sectors have their own risks. Even defensive positions are not necessarily immune from overall market movements.
7. Stay on course by continuing to save and invest.
When the market is continually down, investing more money into it can be hard. However a long-term investor will see a market downturn as a sale on stocks. If you are dollar-cost averaging money into the market, you may get quite a bargain by buying when prices are down. When prices are down, you end up purchasing more shares. Then, when the prices go up, you own more shares with a lower cost basis. Systematic investing does not work if you stop when prices are down.
Additionally, contributing regularly to a savings account for a long-term goal can cushion the emotional impact of market swings. Market volatility may not be so discouraging if your losses can be offset—even a little—by an increase in savings.
8. Remember your road map.
Even with a well-diversified asset allocation, some parts of a portfolio may struggle at any given time. Diversification allows for strong performance of some investments to help offset poor performance by others. Make sure your asset allocation is appropriate before making drastic changes.
Timing the market is a challenge under the best of circumstances. You have to be right not once, but twice: when to get in and when to get out. Wildly volatile markets will magnify the impact of making a wrong decision.
If you invested $1 in the market in 1926 through 2009 and held it the entire period, your portfolio value would be $2,591.82. However, if you missed the 40 best months during that period, the value of your initial $1 investment would only be $15.22.
9. Look in the rear-view mirror.
Past performance is no guarantee of future returns; however, the stock market’s long-term direction has historically been up. Sometimes it helps to take a look back to see how far you have come from when you first began investing. If your portfolio is down this year, it can be easy to forget the progress you have made over the past few years. Having an investing strategy is only half the battle; the other half is being able to stick to it. If patience has helped you build your nest egg, it should be useful now, too.
10. Take it easy.
Step back and breathe. If you feel you want to make changes in your portfolio, take them in gradual steps. You could put any new money into investments you feel are well-positioned for the future, but leave the rest as is. Perhaps you could test the waters by redirecting a small percentage of one asset class into another. Taking gradual steps is one way to spread your risk over time.
For more information about Henssler Financial’s services or investment philosophy, please call 770-429-9166 or e-mail experts@henssler.com.