How to Survive Stock Market Volatility
When volatility is high, investors get scared and let emotions run their decisions. Here are a few tips to help you avoid investment mistakes and survive whatever the market sends your way.
No one can time the market right all the time, even if you do manage to pick the best performing investments, which is a something professional mutual fund manager can’t even do consistently. What determines investment success – or failure – is your behavior, not skill or luck.
In the financial crisis, the Standard & Poor’s 500 index dropped by more than 50%. Five years later, it came up almost 200% from the bottom. The market doesn’t always come back dramatically, but it always comes back. Panicking out a downturn is likely to cause permanent damage to your finances.
You cannot control market ups and downs, but you can:
1. Reassess your risk tolerance. Take a look at your current financial situation and consider making adjustments according to your risk tolerance. But using a questionnaire to determine your risk tolerance is a lot different than actually seeing your portfolio decline in value during a downturn. If you find it hard to sleep at night, consider a portfolio with a new risk level that is comfortable to you. Lower your stock exposure, for example. Just make sure that your new mix doesn’t take you off track to achieve your goals.
2. Turn off the financial news. The financial press doesn’t have a personal stake in your financial goals, so don’t put your finances at risk by reacting to the latest “doom and gloom” headline. Instead, take a break from the financial news if it causes you nothing but worry. Turn to a professional when you want personalized advice. It does no harm to get a second opinion even if you’re a do-it-yourself investor.
3. Set aside some cash. Cash is important for several reasons. Having cash on hand can calm your nerves when the market is falling. If you have near-term cash needs, assess the amount that you should take out. Besides covering expected and unexpected expenses, you need cash when a buying opportunity arises. But be sure not to hold too much cash, since doing so could impair the ability of your portfolio to grow enough to reach large financial goals like retirement.
4. Revisit your expectations about future returns. Base your financial planning projections on realistic investment returns. The double-digit gains over the past few years are a result of the market’s strong recovery from the 2008-09 financial crisis. Don’t count on them to continue long-term. It’s better to be surprised to the upside by using a conservative estimate for your portfolio’s performance than to fall short of overly optimistic goals because the 10-12% annual returns you hoped for didn’t happen.
5. Research and educate yourself on investing. You should care about your financial success more than anyone else. Don’t leave your financial future up to chance. When you receive any financial advice, make sure you understand all the what’s, why’s and how’s.
Follow AdviceIQ on Twitter at @adviceiq.
Neil Vannoy, MBA, CFP, is president of Vannoy Advisory Group, a fee-only financial planning firm with offices in Round Rock, San Antonio and Waco, Texas.
AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.