5 Steps to Navigating Volatile Financial Markets
Turn off the news and watch crazy cat videos online instead. Okay, I am mostly kidding. If you watch a lot of news, however, it can make you nuts. You watch as the financial markets race upward only to turn around and race right back down again! Or, maybe you don’t watch the news at all but you notice your investments are languishing and you are not making any forward progress toward your goals.
Here are three things you need to know:
1. Fear and uncertainty create financial market volatility. You are obviously not the only one feeling uneasy right now.
2. Market volatility is inevitable, as is fear and uncertainty, both in life and investing.
3. Volatility, or “volatility drag,” hurts your investments! For example, if you have a $100 investment and the market drops 10% in value, you now have an investment worth $90. Then, a couple of days later, this same investment goes back up 10%. You do not get your original $100 back! The short trip down and then up the scale costs you a dollar, which now leaves you with only $99 ($90 + 10% = $99). This was a short trip down and up the price scale, and it involved relatively small numbers, but imagine this happening almost weekly and its impact on larger numbers.
In another example, if you lose 30% of an investment’s value, you need the price to go back up 43% to obtain the same amount you possessed before the investment dropped in value.
Now that we have a better understanding of the problems volatility in the financial markets creates for us, what can we do about it?
Five Easy Steps You Can Take To Tame Investment Volatility:
Step 1: Build an investment portfolio to handle the worst-case scenario. This allows you to sleep at night when the financial markets and our world seem to be going crazy. You build your portfolio by creating a diverse mix of investments to dampen future losses and maintain your investing comfort level.
In investing, the word “correlation” means two assets move in the same direction, either up or down in value, at the same time as market conditions change. If they moved in the opposite direction at the same time, they would be considered to have a negative correlation.
The concept of correlation is helpful by knowing that if you own a mix of stocks and bonds, the bonds generally act as a parachute by slowing your overall portfolio losses when stocks decline. Over the long haul, this strategy has proven to be more profitable because it dampens volatility drag and is superior to investing in a single-asset class. Of course, the correlations concept does not work in all circumstances and sometimes your assets all move in the same direction despite normal correlations.
Step 2: Take the long view on investing. Like chess or monopoly, investing is a long game requiring a long-term game strategy. Stay the course and do your best to relax. Periods of unease and volatility are normal. Remember, it is in the news outlets’ best interests to spread as much fear as possible to keep viewers glued to their news sites. Don’t let fear throw you off your investing plan. This is where turning off the news and watching crazy cat videos online comes in. Also, maintain your current investment strategy—especially if it involves dollar-cost averaging.
Step 3: Rebalance your investment portfolio mix back to your chosen asset allocation. Rebalancing is how we win the investment game. It forces us to buy low and sell high, even when we don’t really want to. Portfolio creep actually creates less diversity, increases investing risk, and makes us less money over the long haul.
Step 4: Control what you can control in investing and let the rest go. Here’s what we can control:
1. Asset allocation
2. Keeping all investment fees as low as possible
3. Minimizing taxes, which are simply another fee structure
4. Continuing to study investing concepts and best practices
Step 5: Switch from a threat mindset to an opportunity mindset. It was Warren Buffet who said, “Be greedy when others are fearful.” Bargains exist when other people are afraid and sell off their investments. Buffet bought stocks in 2021 and is again buying them in 2022.
Give these steps a try…and enjoy your crazy cat videos.