Don’t watch from the sidelines. When stock markets become volatile a lot of people will try to guess when the stocks will bottom out. In the meantime, they often park their money in cash and wait until they see an upward trend before re-investing; thus missing out on huge opportunities. Before going to cash investors should consider that after analyzing 29 bear markets since 1929, a fully invested equity portfolio returned 37.1% (on average) in the 12 months that followed the end of a bear market. If an investor sat in cash for the first six months over the same time periods, they would have only generated a return of 7.6% (on average). Moving to cash and missing out on these opportunities can take a huge bite out of your returns.
Use a Dollar-Cost Averaging Strategy. Everyone knows buy-low sell-high, but many investors find it difficult to muster up the courage to invest during a volatile market. The strategy known as Dollar-Cost Averaging can help ease the anxiety wondering “is this really the right time to buy?”. Simply put, the strategy means committing a fixed amount of money to be invested at regular intervals. Many investors already achieve this by having money withdrawn from their bank account on a weekly/monthly basis and investing it directly into a pre-determined portfolio. By doing this, you buy more shares when prices are low and fewer shares when prices are high; over time, your average cost per share purchased may be less than your average market price per share at the end of the year.
Review your portfolio holdings. If you are nervous, now might be a good time to review your portfolio and re-balance if necessary. The weightings in different sectors may have shifted over time as one investment may have preformed better or worse than others. Review your portfolio to ensure you are still properly diversified and your asset mix is still suitable for your goals and risk tolerance.
Tune out the noise and maintain a long-term perspective. Numerous television stations, websites and social media channels are dedicated to reporting investment news 24/7. While the media provides a valuable service, they typically sensationalize bad news and offer a very short-term outlook. Put your investment plan in a longer-term perspective; ideally one that coincides with when you will need to start redeeming the money. Also, focus on how your portfolio has preformed over the last 3, 5 and 10 years.
Stick to your plan. There is no real secret to managing volatility; markets will continue to go up and down. Most people know the best way to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio. However, sticking to your plan can be difficult when markets fluctuate. When put to the test, going against your beliefs can divert you from your long-term goals and lead you to making short-term often regrettable decisions.
If you have any concerns regarding your portfolio or questions about the recent market volatility, please don’t hesitate to give me a call.
Have a great weekend,
Tracey
Source: Franklin Templeton Investments article: 5 Things you need to know to ride out a volatile stock market, franklintempleton.ca. 2018 Ned Davis Research Group, Inc. Ned Davis Research defines a bear market as 30% drop in the Dow Jones Industrial Average after 50 calendar days or a 13% decline after 145 days. Reversals of 30% in the Value Line Geometric Index also qualify. Twenty-nine bear markets were analyzed from 9/3/1929 to 2/11/2016.