One minute, all economic indicators are sitting pretty and the Dow Jones industrial average is hitting record highs. The next — blammo — we are in the throes of a stock market “sell-off.” To prevent a knee-jerk reaction during periods of stock market volatility, follow these five tips:
Trust in diversification
When a market decline hits, your results may vary — and perhaps for the better — if you have invested money across different baskets of asset classes. In this case, it’s best to sit tight and trust that your portfolio is ready to ride out the storm. You will still experience some painful short-term jolts, but this will help you avoid losses from which your portfolio can’t recover.
Remember your appetite for risk
Investing in the stock market is inherently risky, but what makes for winning long-term returns is the ability to ride out the unpleasantness and remain invested for the eventual recovery (which, historically speaking, is always on the horizon). You will be able to do that if you know how much volatility you are willing to stomach in exchange for higher potential returns.
Know what you own — and why
Part of doing stock research is crafting a written record of the strengths, weaknesses and purpose of every investment in your portfolio. You should also include a list of the triggers that would make you sell a given investment. During a market downturn, this document can prevent you from tossing a perfectly good long-term investment from your portfolio just because it had a bad day. Be ready to buy the dip
Keep a running wish list of individual stocks you would like to own. Set aside some cash so you are ready for a flash sale when disaster strikes. Don’t be surprised if you freeze in place during the moment of opportunity. One strategy to overcome the fear of bad timing is to dollar-cost average your way into the investment. This can smooth out your purchase price over time.
Get a second opinion
Hiring a fee-only financial adviser to kick the tires on your portfolio and provide an independent perspective on your plan can benefit even the most confident saver-investor. In fact, it’s not uncommon for financial planners to have their own financial planner on their personal payroll for the same reason.