4 Things Investors Can Do in Volatile Markets
- Volatile markets can cause impulsive decision-making about your portfolio.
- There are things you can do to help hedge your portfolio in times of uncertainty.
- Stay focused on your long-term goals when market challenges and volatility occur.
While the urge to act is natural, it’s almost never a good idea to make impulsive decisions about your portfolios.
There are, however, four things you can do when volatility strikes.
1. Trust in Diversification
When market uncertainty occurs, it’s time to get back to the basics. In other words, trust in portfolio diversification and rely on traditional risk mitigation tools (e.g., Treasurys, gold, liquid alternatives) to play the role they were designed to play in your portfolio.
Diversification may lower a portfolio’s risks by not overexposing the investor to any one type of investment or asset class. Over time, allocations change with market movements, so rebalance regularly to return to your target allocation.
2. Remember Your Long-term Goals
History has shown that time in the market — not timing the market — tends to lead to more successful outcomes over the long term. This is especially true during volatile periods that see large, outsized movements in either direction.
Time is a great leveler, and swift and sizeable recoveries have historically followed steep declines.1 And some of the markets best days have occurred after their worst, as out of the worst 20 days the market was up on 17 of the following days. Four of which were in the top 20 performing days all-time.2
So, if you threw in the towel after one of those bad days, only to get back in the market a day later, you would have left some serious money on the table (Figure 1).
Review Your Financial Situation
Having a wholistic view of what you own, and being comfortable with it, can help you stay focused on the long term and avoid emotionally-driven investment decisions. Volatile markets can be a reminder to review your risk tolerance. You might ask yourself:
- Do I have enough cash for my short-term needs so I don’t have to sell assets that are depreciating?
- What’s my time horizon for these assets?
- If asset prices fall, what assets will I want to sell, and what would I want to buy more of?
- What are my long-term objectives?
3. Ensure Adequate Liquidity
Review the liquidity profile of your portfolio, as well as the liquidity of individual funds within it. Selling in a down market makes what could be temporary losses permanent. Be sure you have sufficient liquidity should you need to trade, as the cost to do so could be high. Our team is here to help.
4. If You Must Trade, Do It Efficiently
If you have to trade, don’t trade using market orders within the first or last 30 minutes of the trading day, when volatility tends to be highest and spreads at their widest. If you are investing regularly, continue to do so with a long-term view. Keep in mind that volatility can provide opportunities to buy quality assets at discounted prices.
In times of uncertainty, focus on what you can control. And know that we are committed to helping you navigate the market when challenges arise.