The markets have certainly been a roller coaster lately. At the end of February the Dow experienced its “first” largest single day drop, down 1191 points, then posted its largest single day gain of 1293 points a couple of days later. On March 10th the Dow beat its single day loss record again by posting a jaw dropping 2021point loss only to follow this up with a larger 2997 point drop on March 16th. This volatility isn’t unexpected when you have a stock market that was consistently setting new record highs come face-to-face with a potential global health threat. In an attempt to ease the market’s downward trajectory, the Fed announced they would cut interest rates making borrowing less expensive and encouraging more business investment. Economic indicators continue to be strong, but with a global pandemic causing countries to limit trade and social distancing limiting people’s ability to purchase goods, it is likely that a highly volatile environment will remain for the short term.
As investors, it is critical not to overreact. You need to block out the surrounding noise and follow your investment strategy in the face of volatile markets. Actions based on emotion and fear can cause you to make mistakes that can negatively impact your long-term investment performance. In 2018, we wrote an article during another period of high volatility and provided some insights for investing in these environments. We would like to share those with you again:
Fight the impulse to sell your holdings if the markets are dropping. Selling after drops can make temporary losses permanent and difficult to recover. Sticking to your investment strategy, while it can be difficult emotionally, may be healthier for your portfolio. It is important to continue monitoring your investments, but remember the long-term reasons the investment is in your portfolio. What role is it playing? If it is still a good fit, holding the investment may be the better long-term strategy.
Remember that you are investing for the long term. Markets have always fluctuated up and down, and during your lifetime you’re likely to experience several significant declines. Investors should ignore the noise and stay disciplined to the investment strategy they designed. The strategy was created specifically to avoid falling into these pitfalls.
Review your risk tolerance. Risk you took on years ago may no longer make sense given your current circumstances and stage of life.
Make sure your portfolio is well-diversified. Volatile markets have a way of exposing improperly diversified portfolios.
Rebalance your portfolio. Market volatility can skew your allocation from its original target. Certain assets will be more affected by market swings and will move outside their target allocations. Rebalance your portfolio by selling positions that have become overweight in relation to the rest of your portfolio and move the proceeds to positions that have become underweight.
If you must trade during volatile markets, there are defensive steps you can take to protect your positions. Stop orders and stop-limit orders can help shield unrealized gains or limit potential losses on an existing position.
Consider adding defensive assets such as cash and cash equivalents, Treasury securities and other U.S. government bonds. These can help stabilize a portfolio when stocks are slipping.
Jeff Witz, CFP® welcomes readers’ questions. He can be reached at 800-883-8555 or at firstname.lastname@example.org.
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