Sometimes the most dangerous part of market volatility isn’t what it does to your portfolio; it’s what it does to your decision-making. Market volatility is just rapid and unpredictable price movements that feel impossible to control. There are many ways to measure it, but often what matters most is how people react to it. Those emotional responses, whether it’s fear, panic, or overconfidence, are where investors can fall into traps that ultimately shape whether the outcome is positive or negative.
It’s been said that market volatility is the investor’s lie detector test. It provides the true answer to how much risk an investor is willing to take, which determines the mix of stocks and bonds in a portfolio.
Market volatility can be planned for, but that doesn’t make it fun. It’s not fun to login and see your portfolio going down. However, it helps to know that the stock market is predictably unpredictable.
What Should Investors Do When the Market is Down?
The questions people often ask when the market is down: Do we do something about it? Do we sell when the stock market is down? Do we buy more? It seems the best way to approach the stock market is in a highly diversified manner, buying a broad basket of the global marketplace. In addition, one of the most common pieces of financial advice for a down stock market is to hold tight and not sell. This is good advice, as it’s been shown to be nearly impossible to time the market just right.
Sometimes it’s tempting to call someone lazy if their strategy is buying a fund and holding it. At times, it can feel almost un-American to think we can’t beat the market. It’s in our blood. However, you should have a long-term mindset when you put money into the market. Any entry point on any day in a diversified portfolio has a positive expected rate of return if history repeats itself.
Solid advice for pre-retirement investors is to buy consistently. To time the market, you have to be right twice: sell before things begin to drop, then predict when the bottom is to rebuy. In addition, missing the rebound is often more impactful than missing the downturn. Evidence shows that consistently investing should give far better and more consistent results than trying to beat the collective wisdom of investors worldwide.
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The Key to Protecting Yourself in the Stock Market
First of all, don’t overleverage yourself. What does this mean? Don’t put money into the market that you’ll need in the short term. Secondly, if you have cash on hand, it may be a good time to buy but make sure you’re investing money that you won’t need for seven to 10 years. If you’re approaching retirement and don’t have years of working ahead of you to replace money lost in a downturn, plan for retirement volatility by having enough money for short-term spending needs in less volatile assets like bonds or money markets.
However, a big key to protecting yourself is not to panic. If a financial advisor can help you not sell during a stock market downturn, that can have a literal generational impact on you, your wealth, and your ability to retire or not retire. Having someone else who is objective and doesn’t have the emotional tie-in you have can help protect your assets by applying research-based wisdom to the decision-making process. In addition, once you are confident you have a good plan in place, turn off the TV, close the news apps, and don’t check your portfolio every day.
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