The current market downturn has made investors nervous, but this is neither the first time nor the last time markets will ebb and flow. The plus side: while they fall, they also, historically, recover.
Triggers for market fluctuation come from a number of different factors, including government policy, earning reports, and geopolitical unrest. These developments can unnerve even the most seasoned investors, according to Fidelity, however “volatility is part and parcel of investing.”
“Dramatic moves in the market may cause you to question your strategy and worry about your money,” said Ann Dowd, CFP®, vice president at Fidelity Investments.
She explained that a natural reaction to such fear might be to reduce or eliminate exposure to stocks, believing this will stop further losses and calm fears. This, she asserted, does not work in the long run.
Her advice: Rather than worry, prepare.
Having an investment plan in place, tailored to your unique goals and situation can help you navigate the market’s ups and downs, and better maneuver toward opportunities.
A regular review of investments and a consideration of investment strategy that should involve exposure to different areas of markets like international stocks, U.S. small and large caps, investment-grade bonds will help you mitigate risk to your portfolio and can be tailored to your goals and personality, Dowd explained.
Fidelity outlines six principles that should be considered by investors during challenging times.
Number one: maintain perspective. Downturns are par for the course and typically short lived: “History shows that the stock market has been able to recover from declines and can still provide investors with positive long-term returns.”
Number two: Pay attention to how you feel about your investments. “If you are nervous when the market goes down, you may not be in the right investments,” according to the article. Tolerance for risk, goals and time horizon should all be considered when building your portfolio.
If your nerves are shot from watching market fluctuations, it might be time to chat with your advisor and find a different mix of investments.
Number three: Do not attempt to time the market. As is explained in the Fidelity article, research from the independent firm Morningstar reveals that investors who buy and sell funds cause the investors’ portfolios to perform worse than if they would have just held the funds.
Number four: Cultivate a habit of investing, even during downturns. It is best to remain disciplined instead of trying to base buying and selling on market conditions. Investing through downturns, although no guarantee of gains or insulation against losses does mean that you should acquire more shares with the lessened costs of stocks.
Number five: Now is the time to explore opportunities. When markets are down, there are some additional options available that are worth a discussion with your advisor. Downturns, for example, present the opportunity for tax-loss harvesting or when an investment is sold and the investor realizes a loss. This can help with tax planning. It is also a good time to discuss a rebalancing of your portfolio with your advisor, to generate a disciplined strategy that allows for you to garner benefits from lower prices.
Number six: Consider going hands-off with your portfolio. Discuss your options with your advisor so that you can be more comfortable with the strategy.
While it is easy to panic, it is wiser to remain disciplined and have open, collaborative conversations with your advisor in order to map out the best path forward.