During this time, it may be somewhat comforting to remember that you are not alone. Everyone is wondering what the immediate future holds for the impact of the COVID-19 virus. Everyone else has the same fears and anxiety that you are feeling right now.
When it comes to your investments, all you can really control is how you react. Sticking to sound, fundamental investing principles and staying the course will help you make it through this difficult time. Here are some practical tips for surviving market volatility in the face of what may seem like an extraordinary crisis right now.
Avoid Hitting the Panic Button
During this time, it’s very tempting (and very normal) to think about getting out of the stock market. Especially on March 16, when the S&P 500 suffered its worst decline since the 1987 stock market crash (also known as Black Monday). But selling solely because the stock market has suffered a big decline over a very short period of time may be the worst thing you can do.
It’s understandable if you’re struggling to keep fear in perspective right now. Over time, however, the stock market has historically risen despite economic woes, terrorism, the burst of the housing bubble in 2008 and countless other calamities. Investors should try to always separate their emotions from the investment decision-making process.
What seems like a massive global catastrophe one day may likely become a distant memory a few years down the road. After all, when was the last time you thought about Black Monday (if you are even old enough to remember it)? Or the Great Recession?
Keep a Long Term Perspective
For many people, a retirement account such as an IRA may be their largest investment asset. And that’s probably the one you are most concerned about right now.
Keep in mind that if you are investing for a long-term goal such as retirement, which may not begin for two or three decades — and could last two or three decades — you should have plenty of time to ride out this current market downturn.
The same may be true with regard to some intermediate-term financial goals you may have, such as saving to buy a home, start a family or fund a college education.
Maintain a Diversified Portfolio
Having a percentage of your portfolio spread among stocks, bonds, and cash assets is the core principle of diversification. Doing so helps manage your risk because historically not all parts of the market move in the same direction at the same time.
Losses in one asset category (such as stocks) may be mitigated by gains in another (such as bonds and cash)1.
Consider This a Great Buying Opportunity
Experienced investors often view bear markets as great buying opportunities because the valuations of good companies get hammered down due to circumstances beyond their control — such as what is happening now with the airlines, hotels, oil companies and many other industries and sectors.
If you’re looking to put some extra cash you may have to work, this may be a good time to consider value stocks and stock funds.
Keep on Dollar Cost Averaging
The principle of dollar cost averaging means you simply commit to investing the same dollar amount on a regular basis. When the price of shares in a stock or investment portfolio drops (like it is now) — you’re actually buying more shares.
Conversely, when the price goes up, you’ll be buying fewer shares. Over the long term, this provides you with an opportunity to actually lower your average cost per share2. If you haven’t already, setting up an automatic savings program for your IRA (versus making one annual contribution) or other investments may make sense.
Be Real About Your Tolerance for Risk
When you started saving for retirement or other financial goals, you went through the process of assessing your comfort level with risk and made investment decisions accordingly. However, you probably never thought your risk tolerance would be tested like it is right now.
If you are literally not able to sleep at night right now due to all the market volatility, that’s probably the most reliable sign that you may need to consider a larger allocation to more conservative investments. However…make sure you consider the next and final tip before you do anything!
Think, Reflect, Sleep on it….and Consider Talking to a Financial Professional
If you are strongly considering making changes to your investments, do so in a thoughtful way and after careful consideration.
We are here to give you the perspective and guidance you need to help weather this storm. Don’t hesitate to contact us today.
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1There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
2 Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
Amounts invested in stocks and mutual funds are subject to fluctuations in value and market risk. Shares, when redeemed, maybe be worth less than their original cost.
Value investments can perform differently from the stock market as a whole. They can remain undervalued by the market for long periods of time.
This material was prepared by LPL Financial, LLC.