5 Things to consider during a volatile market

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  • Published: Nov 02, 2022
  • 8 min to read

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The best thing to do during a volatile market is to stay focused on your portfolio strategy and look for long-term opportunities in the market. 

But that’s easier said than done since market turbulence can make anyone nervous, particularly novice investors who are often tempted to pull out of the market altogether and wait on the sidelines until it seems safe to enter again.

Investors must remember that volatility is inevitable, and without it, people would not be able to profit from the markets.  

Thus, investors should take emotion out of it and reconsider their investment strategy.

Here are 5 things to keep in mind in a volatile market:

1. Diversify your portfolio 

Volatile markets allow investors to re-evaluate their portfolios.  

Often, portfolio owners allocate assets in companies’ business models they do not understand without realizing it, highlighting the challenges of trying to pick winning investments.

Consider finding a company with a strong balance sheet and consistent earnings as short-term fluctuations won’t affect the company’s long-term value.

Additionally, investing in a portfolio of companies that pay dividends is an excellent way to provide cash flow to help mitigate risks during market volatility, while adding bonds to a portfolio can further provide stability and income.

Essential to diversification is owning investments that perform differently in similar markets.

2. Avoid exiting the market early 

There are many ways to react to market volatility, but panic selling during up-and-down activity on your portfolio isn’t one of them.

One of the most common mistakes investors make when stocks fall is to quit as an investor and cash out assets.   Instead of exiting the market, investors should assess their current cash positions and take a more analytical approach to their portfolios.

It can be difficult to catch up if you sell and are still on the sideline during a recovery.  Historically, markets have shown that missing even a few days in the market can significantly undermine performance.

3.  Put extra cash to work

While the market is in a bearish downward state, it may help to think about how much stock you can purchase and allow extra money to work for you instead of holding off on investing.

The stock market is not a place to invest for quick returns.  Rather, the stock market is about the amount of time spent in the market versus timing the market.

If you have surplus cash, have a seven- to 10-year time horizon, and have assessed what you could do with the extra money, like paying off high-interest debt, it probably makes sense to invest in a diversified portfolio.

4. Reconsider your risk tolerance

Investors must be emotionally fit for big price swings and have the financial ability to handle losses.  

Monies that you might need soon and cannot afford to lose shouldn’t be in the stock market and are probably best invested in relatively stable assets.

However, while market downturns can be a wake-up call to reconsider your tolerance and capacity, it’s vital to remain calm and not overreact.  If you’re not sure where the markets are heading,  the best trade to make is probably not to trade at all.

5. Work with a stock broker

Making tough financial decisions are primarily due to limited knowledge, biases, and fear of market movements.

By working with a stock broker or Financial Advisor, you can avoid short-term thinking and ride out the market’s jitter to achieve your goals.

For example, regardless of the market outlook, turning to a stock broker will help you avoid jeopardizing the progress made with saving toward a goal by reassessing your portfolio based on where you stand and reminding you that investing is a long-term proposition.