Staying calm and refraining from making rash decisions are the two most critical things to keep in mind when facing market volatility. Patience and restraint pay off—as does remembering from others’ missteps. Keep the long-term benefits in mind by remembering the number of investors who made emotional rather than logical decisions in 2008-9 and ended up missing out on one of history’s greatest bull markets.
Of course, this kind of advice is easier said than done. Let’s look at a few ways that you can put this advice into practice and work to come out ahead in an unpredictable market.
Stick with What Works
Most likely, many of your investments are part of a long-term plan. When the market is volatile, your investments may take a hit. But stocks cannot go below $0—and they can rise infinitely. Riding out the lows means likely reaping the benefits down the line. When you stick with what works for you, you may be able to fix some if not most of your investment mistakes. You’ll also pay less in taxes, since short-term traders pay at the top of the marginal tax rate.
High-Dividend and Value Stocks
High-dividend stocks can provide much-needed stability in an unstable market. The steady dividend income provides a soft landing, even if the stock price falls, and they can minimize stock price declines.
Value stocks, on the other hand, are considered a bargain because they may have fallen out of favor with the investors. They may be undervalued based on a lower price-to-earnings ratio, underperforming price-to-book ratio, or a higher-than-average dividend yield. In addition, negative press, lawsuits, or poor earnings may have driven down the company’s stock value. Investing in these companies may result in a high-performing long-term investment since the stock is cheaper than the company’s competitors.
Diversifying across Borders
A diverse portfolio can mean a good mix of stock and bonds—and it can mean crossing international borders. US stocks can be overvalued, while stocks in emerging markets as well as overseas developed markets such as Japan, are consistently undervalued. Taking your portfolio international can help balance it against volatility.
In addition, diversification can mean going outside traditional stocks. Sectors such as healthcare and energy can stay steady or go up in uncertain times and in times of supply disturbances. Real estate investment trusts (REITs) act as mutual funds holding real estate portfolios. They generate dividend income as well as produce capital appreciation from the underlying properties. However you decide to diversify, you’ll want to review your risk tolerance and know what works for you before making any decisions.
No matter how the stock market is acting, patience is always key. Keeping the long-term in mind, knowing your comfort level with risk, and keeping a diversified portfolio will all help you keep a cool head when the market heats up. Most importantly, navigating a volatile market is not something you have to do alone—speaking to a financial advisor can help make decisions within your comfort level.
If you’d like further help understanding your money mindset, and putting a plan in place to help take control of your financial story with confidence, then please do get in touch.