Control emotions in volatile markets
April 9, 2015
For the past few years, the stock market has moved up fairly steadily, with no major "corrections." But thus far in 2015, we've already seen periods of volatility — enough, in fact, to make some investors jittery. Nervous investors may be more prone to make decisions based on short-term market movements — so how can you stay calm?
First of all, when evaluating your investment decisions, stay focused on those factors that have historically driven stock prices. The U.S. economy is growing at a reasonably good pace, and corporate earnings remain fairly strong. Plus, stocks may not be as undervalued as they were a few years ago — as measured by the price-to-earnings ratio (P/E) — but they still aren't overly expensive, either. Things can change, of course, but when market volatility seems to be primarily caused by short-term events, such as plunging oil prices, it's important to look beyond the headlines to these less glamorous, but probably more important, fundamentals of good investing. By doing so, you can help avoid making fear-driven investment choices.
What else can you do to help ensure that you don't let feelings of anxiety influence your investment moves? For one thing, evaluate your investment mix. If you own too many stocks and stock-based vehicles, you could take a big hit if stock prices fall sharply during periods of volatility. Historically, however, bond prices have typically increased when stock prices fell — although, of course, there are no guarantees. So, if your portfolio consists of stocks and bonds, you are better positioned to weather the harshest effects of market turbulence.
To further prepare yourself for downturns, you may also want to diversify your fixed-income holdings to include investments such as U.S. Treasury bills, certificates of deposit (CDs) and municipal bonds. The percentages of each type of investment within your portfolio should be based on your goals, risk tolerance and time horizon.
Finally, you can help yourself maintain an even-keeled approach to investing by always looking for quality. Typically, higher quality investments fare better during market declines and recover more quickly when the markets rebound. How can you judge whether a particular investment is of good "quality"? A long-term track record is useful to study. It's certainly true that, as you have no doubt heard, "past performance is no guarantee of future results," but it's nonetheless valuable to know how a particular stock, for example, has performed in various economic environments. If it seems to have done well relative to others in its industry and over long periods of time, that may give you a good idea of its quality.
It's never easy to take all the emotions out of investing, especially during periods of market volatility. After all, you count on your investments to help provide you with the type of future you've envisioned. But by focusing on the fundamentals, putting together an appropriate investment mix and constantly looking for quality, you can help "de-stress" yourself — and, as the American poet, novelist and historian J.G. Holland once said, "Calmness is the cradle of power."
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This article was written by Edward Jones for use by your local Edward Jones Financial Adviser. Douglas J. Drost CFP Financial Adviser for Edward Jones, 2262 Reno Highway.