How Smart Investors Handle Stock Market Volatility

stock market - square

It really is human nature to look at this massive wave of selling and panic within the stock market and panic a little yourself. But it’s important to remember that according to financial experts, what’s going on in the markets right now is not a repeat of the 2008 financial crisis and Great Recession.

The global economy is still growing, even if it’s slower than everyone wants. And in the U.S., banks and individuals are carrying a lot less debt, meaning people have more “rainy day” funds on hand if the downturn gets uglier.

The goal for most Americans is to invest for decades, not days. Yes, stocks gyrate up and down, but over every 15-year period since World War II, they have made money for investors, often a lot of money.

The market rewards optimists — and pragmatists.

Intelligent (long-term) investors tend to do three things when markets sour:

1. Don’t panic. Investing is as much about psychology as numbers. Selling out of fear is almost always a mistake.

2. Diversify. The No. 1 investing mistake people make is that they don’t diversify. In plain language, diversification means not putting all your eggs in one basket. Simple as that, really.

Investors today are encouraged to diversify among stocks, bonds and real estate.
Consider what’s happening in the market now: stocks and oil prices are tumbling, but government bonds and gold are rising. Investing in a variety of assets should help you lose less money in the downturns but still capture most of the upswings.

3. Rebalance. Good investors have a plan such as investing roughly 70% in stocks and 30% in bonds. From time to time, they check in to make sure their portfolio is still adhering to the plan, and if it’s not, they buy and sell a little to get it back to the target.

But once you have your diversified portfolio, you have to stick to it. That requires annual — or at least occasional — check ups.

Someone who had about 65% of their investment portfolio in stocks in 2009 has close to 80% in stocks today because stocks have gained so much more than bonds in recent years.

That’s a lot more stock exposure — and risk — than they realize.

A quick call to your investment adviser — or simply logging into your account online — should show you a breakdown of how much of your portfolio is in stocks now. It may be a wise time to sell some stocks and get back closer to your long-term target.

Wall Street and independent experts rarely agree, but almost all of them are saying 2016 will see more wild swings.

Comments are closed.