In turbulent markets, it’s important to remember some basic, time-tested principles of investing.
When the market is volatile, almost everyone thinks about their financial future and the potential impact such fluctuations may have on their long-term goals. You may be tempted to make major changes to your portfolio in response to market events. However, during these turbulent times it’s important to take a step back and reflect on certain basic, time-tested principles of investing.
You may be anxious about the decrease in the value of your investments. But don’t simply move out of the market. For most long-term investors, it’s better to remain on the sidelines and wait for prices to rebound. Trying to time the market could potentially jeopardize your financial strategy—and your future goals.
It may not seem intuitive, but continuing to contribute to your personal portfolio, retirement plan or other investment accounts—even during market downturns—can potentially enhance your returns over the long-run. A down market can be an opportunity for you to acquire more shares of your investments at a lower price.
Consistent investing through market ups and downs is called “dollar-cost averaging.” If an investment’s price is high, you buy fewer shares, or units. When prices are low, you buy more. Investing regularly, using dollar-cost averaging, can help reduce the risk associated with buying during big swings in market prices.
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 by investing in a wide variety of asset classes and investment vehicles can help reduce risk and volatility. While investing in a diversified portfolio may be uncomfortable in the near term, it can be the key to a more reliable, smoother investment experience in the long run.
Any investment decisions you make should be based on your financial goals and objectives, time horizon and risk tolerance, rather than concerns about market volatility. Even if the market seems volatile, remember that ups and downs are normal. It is important to stay focused on your financial future and refrain from making short-term decisions on long-term investments.
History demonstrates that there will always be some degree of uncertainty and volatility in the markets. While market events are out of our control, we do have control over our financial objectives and how our investments are allocated to help us achieve them.