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:
- A Beginner’s Guide to Portfolio Diversification
- Asset Allocation: Getting Ahead of the Curve
- Benefits of Portfolio Diversification
- Sign up for Personal Capital and schedule a free consultation with a financial advisor
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.
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