Investing during periods of market volatility can be a harrowing experience, especially if the value of your portfolio drops significantly. However, it is important to remember that volatility is a natural part of investing. The key is to take steps to manage that volatility so that you remain in a position to benefit from future market rebounds. The following tips can help.
#1 – Diversify.
One of the best ways to manage portfolio risk during periods of market volatility is by maintaining a diversified asset allocation. This way, when one type of investment is performing poorly, you may have a different type of investment that is performing better and can help offset losses. Consider diversifying across a mix of investment types, asset classes, sectors and regions.
#2 – Use volatility to your advantage.
While market drops can be difficult to endure, they also provide opportunities for savvy investors. For example, a drop in share price allows investors to pick up additional shares at a “discount” to normal prices. This can put you in a position to take advantage of a future market rebound.
Dollar-cost averaging is one strategy that can allow you to use volatility to your advantage. By investing an equal amount at regular intervals, regardless of an asset’s current share price, you can purchase more shares when prices drop and fewer shares when they are comparatively overpriced.
#3 – Establish a long-term strategy.
Following a long-term investment strategy can help you avoid the pitfalls of making emotionally driven investment decisions, such as selling low and buying high. It can also help you feel more confident and secure during down markets because you know your portfolio is specifically designed to weather market volatility.
#4 – Reassess your risk tolerance.
During periods of market volatility, it is important to maintain an appropriate level of portfolio risk. This practice can help you avoid the mistake of having a portfolio that’s too aggressive, which may tempt you to make a fear-driven decision to sell an investment at a loss. It can also help you avoid the mistake of investing in a manner that is too conservative to keep up with inflation and meet your long-term goals.
Your financial advisor will work with you to complete a risk assessment and develop a portfolio you feel comfortable with. This risk assessment should take into consideration a wide range of factors, such as your investment timeline, your level of comfort with risk, your particular goals and objectives, and any other financial challenges you face.
#5 – Periodically rebalance.
Portfolio rebalancing is the process of selling off a portion of portfolio assets that have grown in value and reinvesting that money back into investments that have shrunk in value in order to restore the portfolio to its target allocation. Periodically rebalancing your portfolio helps ensure it remains in line with your risk tolerance and diversification efforts. This is an important part of your risk management strategy, because it prevents one asset type from dominating your portfolio.
At United Capital, we help investors develop strategic, long-term portfolios specifically designed to meet their needs and weather market volatility. If you could use some help with your investment strategy, we would love to have a conversation. Contact us to schedule a call.
