You are intelligent
So don't get panicky, stay invested…be calm.
No investor likes to hear that the market has experienced a big drop, like we experienced yesterday, September 29, in wake of Indian Army's surgical strike against the terrorists in PoK. The BSE Sensex tanked about 500 points following the investment redemption pressures.
But volatility is part and parcel of investing. A natural reaction to that fear might be to reduce or eliminate any exposure to stocks, thinking it will stem further losses and calm your fears, but that may not make sense in the long run.
There are many things about our financial future that we can control, including our budgets, our spending habits and how we save. Most of them feel that they are in control of their financial futures. But no matter how in control we feel, even the smartest, savviest investor can't control the market.
A key to weathering market volatility is staying invested for the long haul. The market will have its ups and downs, but using these tips can help you stay the course.
Don't withdraw. With market downturns you may be tempted to move money out of your plans or withdraw assets. If you take money out of your plan, you're missing out on compounded gains, as well as any gains that the market makes while that money isn't invested. Making decisions based on what the market is doing short-term can negatively impact your long-term goals. Plus, there are tax implications to consider surrounding a withdrawal, and you could be subject to penalties and exit loads.
Diversify your portfolio. A financial professional can help you understand the type of diversified portfolio that is right for you, based on your age, risk tolerance and goals. By diversifying among and within asset classes, you can help balance risk and return. As you get closer to retirement, you may want to move away from growth-based to more income-based investments.
Re-balance to manage risk. While your risk tolerance may change as your get older and will affect how you allocate your assets, changes in the market can also change your asset allocation. Over time, your stocks and bonds may grow at different rates, which can alter your investment plan. By re-balancing your portfolio, you can get back to your target allocation. You also may be able to take advantage of auto-rebalancing if your plan offers it, or you may be able to invest in a target-date fund, which may automatically re-balance to ensure your allocation stays aligned with your goals.
Dealing with a volatile market isn't easy, and leaving your money in the market as it fluctuates can feel difficult. But with these tips, the advice of your financial professional and a solid investment strategy, you can ride out the dips in the market.
So instead of being worried by volatility, be prepared. A well-defined investment plan tailored to your goals and financial situation can help you be ready for the normal ups and downs of the market, and take advantage of opportunities as they arise.
Downturns are normal and normally short lived.
Market downturns may be upsetting, but history shows that the stock market has been able to recover from declines and can still provide investors with positive long-term returns. In fact, over the past 35 years, the market has experienced an average drop of 14% from high to low during each year but still had a positive annual return more than 80% of the time.
Be comfortable with your investments.
If you are nervous when the market goes down, you may not be in the right investments. Your time horizon, goals, and tolerance for risk are key factors in helping to ensure that you have an investment strategy that works for you.Even if your time horizon is long enough to warrant an aggressive portfolio, you have to be comfortable with the short-term ups and downs you'll encounter. If watching your balances fluctuate is too nerve-racking for you, think about reevaluating your investment mix to find one that feels right.
But be wary of being too conservative, especially if you have a long time horizon, because strategies that are more conservative may not provide the growth potential you need to achieve your goals. Set realistic expectations, too. That way, it may be easier to stick with your long-term investment strategy.
Do not try to time the market.
Attempting to move in and out of the market can be costly. Research studies from independent research firm Morningstar show that the decisions investors make about when to buy and sell funds cause those funds in their portfolio to perform worse than they would have had the investors simply bought and held the same funds.
If you could avoid the bad days and invest during the good ones, it would be great-the problem is, it is impossible to consistently predict when those good and bad days will happen. And if you miss even a few of the best days, it can have a lingering effect on your portfolio.
Invest regularly despite volatility.
If you invest regularly over months and years, short-term downturns will not have much of an impact on your ultimate performance. Instead of trying to judge when to buy and sell based on market conditions, if you take a disciplined approach of making investments weekly, monthly, or quarterly, you will avoid the perils of market timing.
If you keep investing through downturns, it won't guarantee gains or that you will never experience a loss in value, but when prices do fall you may actually benefit in the long run. When the market drops, the prices of investments fall and your regular contributions allow you to buy a larger number of shares/units.
Take advantage of opportunities.
There may be a few actions that you can take while the markets are down, to help put you in better position for the long term. For instance, if you have investments you are looking to sell, a downturn may provide the opportunity for tax-loss harvesting-when you sell an investment and realize a loss and offset it against other gains as applicable. That could help your tax planning.
Finally, if the movement of the markets has changed your mix of large-cap, small-cap, foreign, and domestic stocks, or your mix of stocks, bonds, and cash, you may want to re-balance to get back to your plan. That could provide a disciplined approach that helps you take advantage of lower prices.
The bottom line
Rather than focusing on the turbulence, wondering whether you need to do something now or wondering what the market will do tomorrow, it makes more sense to focus on developing and maintaining a sound investing plan. A good plan will help you ride out the peaks and valleys of the market and may help you achieve your financial goals.