Gird Yourself For a Bumpy Ride
By Beth Blecker
When the stock market takes one of its periodic roller-coaster rides it can be useful to have strategies in place to prepare you financially and psychologically to handle the volatility. Here are 11 ways to help keep you from making hasty investment decisions.
- Have a Game Plan: Predetermined guidelines to help spot potential turbulence can help prevent emotion from influencing your decisions. Consider taking a “core-and-satellite” approach. This combines the use of buy-and-hold principles with tactical investing based on a shorter-term outlook. Diversification can also be used to try to offset the risks of certain holdings with those of others. While diversification may not ensure a profit or prevent loss, it can help you understand and balance risk.
- Know What You Own and Why: Knowing why you originally made a specific investment can help evaluate whether your reasons still hold when things go awry. Understanding a specific holding’s role also can help you consider whether a lower price might be a buying opportunity. And if you don’t understand why a security is in your portfolio, it’s important to find out.
- Everything is Relative: Variance in portfolio returns can often be attributed to asset allocation. A well-diversified portfolio includes multiple asset classes. If your investments are performing in line with relevant benchmarks, you may feel better about your overall strategy.
- This Too Shall Pass: Financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having missed a buying opportunity, you may get another chance. A volatile market may be the wrong time to make wholesale changes. A well thought-out asset allocation is still the basis of long-term investing.
- Learn from Your Mistakes: Anyone can look good during bull markets. Smart investors are produced by the inevitable rough patches. If an earlier choice now seems rash, consider taking a tax loss, learn from the experience and apply the lesson to future decisions.
- Consider Playing Defense: During periods of volatility many investors reallocate to such defensive sectors as consumer staples or utilities (though those sectors involve their own risks and are not necessarily immune from market movements). Dividends also can help cushion the impact of price swings.
- Stay On Course/Continuing Saving: Regularly adding to an account designed for the long term may cushion the emotional impact of market swings. If losses are offset in part by new savings, your bottom-line may not be so discouraging. While not guaranteeing a profit or protecting against a loss, dollar-cost averaging — regularly investing a specific amount regardless of fluctuating prices —may get you a bargain when prices drop.
- Use Cash and Keep Calm: Cash can be the financial equivalent of taking deep breaths. A “cash cushion” coupled with a disciplined investing strategy can change your perspective on market volatility, helping you avoid having to sell stocks to meet ordinary expenses.
- Remember Your Road Map: Solid asset allocation is the basis of sound investing. When adequately diversified, strong performance by some investments may help offset poor performance by others. Timing the market is generally not advisable. Be sure your asset allocation is appropriate before making drastic changes.
- Look in the Rear-View Mirror: If your portfolio is down one year look at the progress you may have made in prior years. Though past performance is no guarantee of future returns, the stock market’s long-term direction has been up. Having an investing strategy is half the battle, the other half is sticking to it.
- Take It Easy: Feeling you need to make portfolio changes may not mean a total makeover is necessary. You can redirect a small percentage of one asset class to another. Similarly you can make new investments you feel are well-positioned for the future, but leave the rest as is. You can have an informal threshold below which you will not allow an investment price to fall before selling. Gradual steps can spread risk over time and across asset classes.
Beth Blecker is co-founder and CEO of Eastern Planning, Inc., a full-service financial planning firm with offices in Nanuet and Rye, NY. www.easternplanning.com