4 tips for navigating volatile markets

Market volatility graph

Key Points

  • During market fluctuations, keeping emotions in check and avoiding sudden moves are key
  • Remember that volatility can bring investment opportunities as well as challenges
  • With smart defensive strategies in place, a downturn doesn’t have to be a derailer

Markets don’t move in a linear fashion, but through periods of loss and gain. The gains you may realize over the long term — even through periods of market volatility — can be one of your greatest investment allies.

That doesn’t always make volatile markets easier to take. Emotions can play a role in investing decisions, especially during down markets.

Having a game plan can help remove emotions from the equation, enable you to make the most of potential market opportunities and help preserve your assets during periods of volatility.

Your advisor can help answer key questions many investors ask during uncertain markets, including:

  • What’s behind the current market volatility, and how long is it expected to last?
  • How can I determine if my tolerance for risk has changed?
  • What actions should I take to help preserve my investments or adjust my asset allocation? 

Here are four defensive moves that can help you invest with an eye toward volatile markets.

1. Consider your asset allocation

Asset allocation is designed to help create a balanced portfolio of investments. Your age, risk tolerance and investment goals are used to calculate a mix of stocks, bonds, cash and other assets appropriate for you.

Different types of assets carry different levels of risk and potential for return and may not respond to market conditions in the same way at the same time. For instance, when the return of one asset type is declining, the return of another may be growing — though there are no guarantees. If there is a notable downturn in a single holding, strategically owning a variety of assets can provide a buffer for your overall portfolio.

Asset allocation strategy has become even more relevant in recent years as the mix of asset classes to choose from has become more varied. For instance, emerging market stocks and bonds, high-yield bonds, real estate investment trusts and master limited partnerships are now often part of a diversified portfolio.

Using asset allocation, work with your advisor to identify the asset classes that are appropriate for you and decide the percentage of your investment dollars that should be allocated to each class.

2. Look at investment diversification

Diversification is a simple yet powerful investment strategy to help reduce risk in your investment portfolio. Not only can you diversify across asset classes by purchasing stocks, bonds and cash alternatives, you can diversify within a single asset class.

For example, when investing in stocks, you can choose to invest in unrelated companies, industries and regions. This helps reduce the risk from any one investment and shore up your portfolio against market volatility. If one investment performs poorly, it may be offset by another investment that performs better.

3. Revisit your risk tolerance

Volatile markets naturally test investors. You may find that your stomach for risk has changed after going through recent market upheavals. That’s only natural, and it’s important to adjust your plan if needed.

At the same time, don’t overdo it. Keep in mind that you may need some growth-oriented investments in your portfolio to achieve your retirement planning goals.

To determine whether your risk tolerance has changed, ask yourself these questions:

  • What are my investment goals?
  • Do I want aggressive growth?
  • Or do I want to focus on avoiding losing money?

An advisor can help reevaluate your risk profile based on your individual situation and financial goals and then help you adjust your portfolio if necessary.

4. Use a disciplined buying strategy

Dollar-cost averaging is a tactic that may help put market volatility to work for you over the long term. It simply means that you contribute the same amount of money to your investments on a regular basis. Investing a set amount means you buy more shares when the price is lower and fewer shares when the price is higher.

Over time, the average cost of your shares will usually be lower than the average price of those shares, and you avoid the risks of trying to time the market. (See the table below.) Although it’s tempting to buy stocks when the market is going up and sell when the market moves down, individual investors rarely get the timing right. With dollar-cost averaging, you have a strategy for pursuing your long-term investment goals regardless of market highs or lows.

What dollar-cost averaging looks like

Monthly investment         Cost per share      Shares purchased
$500 $25 20
$500 $20 25
$500 $10 50
$500 $20 25
$500 $20 25
Total: $2,500 Avg. cost/share = $17.24    145 total shares

Dollar cost averaging does not assure a profit or protect against losses in a declining market.  However, over longer periods of time it can be an effective means of accumulating shares.  Investors should consider their ability to continue investing through periods of low market prices.

Talk to us

A financial advisor can help take emotions out of the equation during periods of volatility while working with you to balance your goals and market conditions.