The markets don't always behave the way we'd like them to: Geopolitical turmoil, natural disasters, interest rates and world events can have a profound effect on market movements. If recent market volatility has you concerned about the economy, you are not alone; this is a confusing time for many investors. Some have decided to stay the course, while others are sitting on the sidelines waiting for the market to rebound. However, since no one can predict how the markets will perform, it's important to develop an investment strategy that can help you stay on the right track to meeting your long-term financial goals. Here are some strategies that you can implement today, that may help to manage risk during these uncertain times.
Work with a financial advisor. There are a lot of do-it-yourself investment resources available to investors today. However, none of those resources can replace the experienced, personal service a financial advisor provides. A financial advisor can offer an understanding of your complete financial picture, not just your investments. Additionally, in periods of market volatility when you need the most support, a financial advisor can provide:
• Access to important decision-making research and information;
• Ongoing monitoring of your investment portfolio, while anticipating your changing needs; and
• A comprehensive market-volatility plan.
Have a plan. Developing a financial plan is one of the best ways to meet your long-term goals. Your plan should also include an action plan to address market volatility, which should be developed well in advance of a turbulent market. Having a market-volatility plan will help you to set realistic goals and appropriately manage your return expectations.
Invest regularly. It may not seem intuitive, but investing regularly-even during market downturns-can help to reduce your overall costs. Dollar cost averaging is one of the best ways to invest regularly, since you're investing a fixed amount on a fixed schedule, regardless of how the markets perform. Investing regularly can also have intrinsic benefits: It encourages discipline and may also ease the anxiety of daily market fluctuations.
Diversify. If you've ever heard the saying, "Don't put all your eggs in one basket," then you already have a basic understanding of diversification. Diversifying your portfolio can reduce risk and volatility if the assets have little or no correlation to each other.
Investing in mutual funds is one way to achieve portfolio diversification, since mutual funds are typically a diversified investment. There are also several other ways to diversify and potentially reduce portfolio volatility:
• Within an asset category, such as purchasing different types of mutual funds;
• Among asset categories, such as purchasing stocks and bonds; and
• Outside of the United States, since some markets move opposite to the US stock market.
Put volatility to work for you. Do you think of the glass as half empty or half full? Your perspective can affect the investment decisions you make during market downturns. Investors who view market volatility negatively can make irrational decisions. A down market can be an opportunity for you to build your portfolio and take advantage of lower unit costs.
Stay invested. You are probably anxious during times when the value of your investments has decreased. As a result, you may be tempted to move out of the market, sit on the sidelines and wait for the market to rebound. However, since no one knows how the markets will move, how do you know you're leaving at the right time? Also, how will you know when it is the right time to get off the sidelines and start investing again?
If you have worked with a financial advisor, your investment strategy was developed to help you meet your long-term goals. Timing the market could potentially jeopardize your financial plan-and your future goals.
Be patient. There will always be uncertainty in the markets; market volatility is a natural part of the investment cycle. Although it may take some time, markets do rebound.
In the meantime, call your financial advisor to help you develop an action plan for market volatility and continue to focus on your long-term investment goals rather than short-term market moves.
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