“Investing is most intelligent when it is most businesslike” – Benjamin Graham.
Investing in the stock market without instability is as illusory as a car without an engine. Investments and volatility always go hand in hand. Avoiding volatility will result in preventing investments altogether. Market uncertainty is bound to cause some panic and result in poor investment decisions, but by recognizing short-term market risks, we can ensure that long-term plans do not derail due to short-term uncertainties.
Following are five tried and tested principles for everyone to hold on to during market fluctuations:
- Keep calm and carry on with the bigger-picture perspective
Though past performances do not guarantee significant future results, history does provide comfort during turbulent times. Despite significant economic challenges, the stock market has seen a historic rise. Investors generally face a loss of two and a half times more than a gain of the same magnitude. Understandably we go through an emotional ride when investing. Knowing this will help us stay calm and focused on reaching long-term goals during turbulent markets.
- Be flexible during downturns
Manage expenditures per your earning status. Look for ways to invest more when earning and spend less if retired in unstable market conditions.
- Maintain an emergency fund
Make sure to maintain an emergency fund. The thumb rule to be applied here is to keep a fund of about four to six (preferably closer to 6) months of living expenses This will prevent the drying up of retirement savings during market downturns.
- Keep in mind the time horizon
If the money won’t be needed for years, there is more than enough time to recover it in case of setbacks. Starting invested though not always easy, almost always translates to a better outcome.
- Do not self-isolate investments
Before taking any action, it is wise to speak to a partner or spouse, a family member, or a trusted friend with good interest in mind, followed by talking to a financial professional who can offer expert advice based on the circumstances.
- Diversify portfolio
Diversification is often equated to not putting all your eggs in one basket. This is a tried and tested technique, mixing various types of investments in a portfolio to minimize risks. It is essential to understand that every asset class will consistently remain among top performers, and the best and worst performers keep changing yearly.
Including investments that are not correlated to each other or text differently to market and economic changes will help with gains in some and offset losses in others.
However, there is no guarantee that overall returns will be enhanced with the diversification of the portfolio or that a diverse portfolio will perform better than a non-diversified portfolio. Diversification will not protect against market risk but might help with its impact.
Even the most seasoned investors can lose sight of the bigger picture during short-term Market ups and downs. Harding Financial can help develop a financial plan, recommend investments and help navigate rough waters. Research has shown that investors make better savings and good investing habits, about four times the wealth of their counterparts who don’t have an advisor. An expert financial advisor views the portfolio more objectively and helps in achieving long-term goals successfully.
