5 Ways to Win Amid Market Volatility
Dear Rich Lifer,
It’s thought that the pain of losing is psychologically twice as powerful as the pleasure of gaining.
Whether you realize it or not, loss aversion is influencing how you invest your money.
After experiencing a significant loss like the 2008 financial crisis you’d be inclined to invest more money, right? Knowing there’s a good chance the market will recover and you’ll ride the rebound?
If you answered yes, that’s what most people say.
But actions tell a different story. The fact is most people didn’t ride the recovery in 2008 because of their loss aversion.
If you let market uncertainty cause you to panic, it’ll lead to poor investment decisions. By being able to recognize short-term volatility for what it is, you can ensure your investments stay the course and continue to grow.
There’s nothing you can do to control the market. However, it doesn’t mean you should pull your money out of the market either. The key is to focus on controlling how you respond to market volatility, so you only expose what you have to.
Here are five ways you can weather any market storm…
Spread Your Eggs Out
One of the easiest ways to lower your risk in a volatile market is to diversify your portfolio. Look at investing in different sectors and in non-correlated asset classes.
Just because one industry or country may be experiencing wild swings, doesn’t mean every industry is experiencing them. If your portfolio is diversified, you mitigate the highs and lows which makes it easier to ride out the storm.
For example, if you had invested 100% of your money in airline stocks over the past year, you’d probably be losing sleep. But if you invested some money in airline stocks as well as in industries like banking and tech, you’d probably be in much better shape, and the gains may have even outweighed your losses. Whatever you do, don’t put all your eggs in one basket.
Take Advantage of Dollar-Cost Averaging
Remember the example we gave at the beginning of investing a large sum of money into the market right before the 2008 financial crisis?
You can reduce your risk of timing a lump-sum investment like this by leveraging dollar-cost averaging.
By investing a fixed dollar amount on a regular basis, you end up buying into the market at different peaks and valleys.
For example, imagine you have $10,000 to invest toward your retirement. If you put the entire lump sum in all at once and then the market crashes right afterward, it might be hard to stomach the dip and you may feel like you need to pull out some of the money to cut your losses.
Instead, if you invested $833 every month for a year, you might not even notice the dip. And because you’d end up buying at the lower levels of the market too, you’d ride out the recovery and it would smooth out your total gains.
Over time, dollar-cost averaging proves to deliver higher returns versus lump sum investing. It’s also a great system you can automate to save time. You can set up automatic contributions and then forget about them.
Learn About Economic Cycles
Learn from history or be doomed to repeat it, right? There have been some bad times in stock market history. Black Friday 1929, the housing crisis in 2008, and of course the pandemic 2020 to name a few.
If you learn about economic cycles that have unfolded in the past, in the U.S. and around the world, you’ll begin to see patterns.
Markets will go up and down for months, and sometimes years at a time. But the one reassuring thing is markets tend to go up over time. So, if you’re investing for retirement, keep this top of mind as your investments ride the market waves.
Short-term fluctuations are part of the game. If you know you’re investing for the next 20 years, it’s easier to hold tight and keep investing on a regular basis.
Have Two Plans
If you’ve followed our first three tips, you should now have a well diversified portfolio that you’re investing in on a regular schedule. You know that markets fluctuate and short-term changes are no reason to panic if you have long-term goals. This is your Plan A.
If you want to take on more risk outside of your Plan A, in hopes of making above average returns, you can start building a Plan B portfolio. This could be a collection of individual stocks and cryptocurrency you own.
Your Plan B will be exposed to more market fluctuations but the potential for higher returns can often be worth it. However, the one rule you should follow for your Plan B is don’t invest more than you can afford to lose.
Think of these investments as separate from your Plan A portfolio. If your Plan B portfolio were to get wiped out tomorrow, you’d still be okay financially.
Set Dates to Check Your Investments
This might sound overly simplistic but one of the best ways to manage market volatility is by not looking at your investments every day.
The more you follow your investments, the more likely you are to be influenced emotionally if they fluctuate. To stay sane, schedule dates in your calendar when you are allowed to review your investments.
Depending on your goals, this could be an annual, bi-annual, or monthly exercise. The point is don’t check your long-term investments every day. This will dramatically decrease the chances of you selling too early or buying too high.
Keep these five tips in mind as we enter what appears to be some rough market waters ahead.
To a Richer Life,
The Rich Life Roadmap Team