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How To React During Market Volatility

As investors across the globe have seen, the market had a bumpy ride this week.

The market experienced another selloff this week amid President Trump’s threat to impose tariffs on China, and the downturn has many investors nervously awaiting news on a trade deal. It can be scary when the market takes a beating like it did this week – but the cardinal rule of investing is to stay the course, and not let emotions dictate your decision making. But it’s hard! Seeing red on the ticker every day is no fun for anyone. So how should you react when the markets are uncertain and volatile?

In this article, we’ll unpack a few basic investing principles that are important to keep in mind when the markets take a nosedive. As you monitor your portfolio during volatile times, make sure to keep these factors in mind.

Market Volatility is Normal and it is Important Not to Overreact.

With this week’s action, it may feel like the market has been bumpy, but when you look at markets historically it hasn’t been as extreme as it may have felt.

This week, we some some big declines before a bounceback back on Friday. Usually, when the U.S. stock market declines, corrections mean an average drop of 13% and bears mean an average drop of 30.4%. Volatility may feel concerning when you’re in the midst of it, but taking risk and avoiding knee-jerk reactions to downturns is also what drives wealth creation for stockowners.

During volatile market times, it’s crucial to maintain patience and discipline. If you’re an investor, you’re also a human – meaning that it’s not so easy to kick back and stay calm during downward volatility. Nobody likes to see the value of their portfolio decline. So if you have a financial advisor, the most important thing he or she can do for you when the market takes an unsettling turn is help you avoid making rash portfolio changes – and stay the balanced long-term course.

A Diversified Portfolio is the Best Way to Position for Whatever Comes Next.

Regardless of market conditions, diversification is key. It’s one of the best ways your portfolio can cushion itself against bumpiness in the markets.

When market conditions are volatile, it’s a good time to assess how well-diversified your portfolio is and make any changes needed. Here are some resources on diversification:

When markets are good, confident predictions can lead to mistakes that can derail your portfolio. You can’t control the markets, but you can take ownership of your investment strategy and asset allocation.

When stocks decline, your portfolio declines too. That’s why you diversify – to cushion against a decline like what we’ve seen in markets this week. If you’re invested in U.S. stocks, you’ve seen that the few hot stocks that were supporting the market have started to fall out of favor. On a relative basis, that bodes well for a more diversified sector and style approach.

We all know that markets go both up and down, and when they go up we’ll likely see substantial upside potential in a few battered and unloved sectors, like emerging markets stocks and bonds. Over the last several years, U.S. stocks have trounced all other major asset classes. That won’t last forever, and those that stay diversified and rebalance periodically will reap the benefits.

Don’t Let Emotion Get the Best of You.

It’s normal for investors to be nervous during volatile markets, especially given the battering the market took in Q4 of last year. We encourage investors not to succumb to the stress of a volatile market by bailing out or chasing the latest asset class du jour.

As a rule of thumb, focus on a global, multi-asset class portfolio strategy to deliver superior risk-adjusted returns over time. And when the markets take a dip, remember the importance of a long-term plan for your personal situation that will ultimately provide the best chance to get the financial returns you need.

If you have any additional questions or concerns, contact a financial advisor.

Contact a Financial Advisor

Disclaimer: The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Third party data is obtained from sources believed to be reliable; however, Personal Capital Corporation (“Personal Capital”) cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Personal Capital of the contents on such third party websites. Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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1 Comment

  1. John Weiss

    What happens to dividends? Are they reinvested in the stock that generated them (drip) or somthing else?

    Reply