Staying invested during market ups and downs is simple – but not always easy.
While the ups and downs of equity markets are largely unpredictable, their effect on investor behaviour very often is predictable. Recent market volatility provides you the opportunity to do a “gut check” on your comfort level with risk.
Spikes in market volatility, while unsettling, may prompt you to abandon your long-term plan for the short-term reprieve that cash and other liquid investments offer. If the temptation to retreat to the sidelines takes hold, ask yourself if the market or economic events fueling the downturn changes your long-term goals.
As you consider your options, keep the following in mind:
Manage risk, don’t avoid it
Taking on investment risk doesn’t need to be an all or nothing approach. Consider finding a middle ground with an investment solution that offers a balanced approach to risk and return. Not surprisingly, reducing your exposure to riskier investments will help to lower the overall risk of your portfolio, but taken too far, you could increase your exposure to other risks, such as longevity risk – the risk that you’ll outlive your retirement savings. The key to long-term investment success is balancing growing your savings in line with your needs and expectations with a mix of investments that will let you remain at ease.
Put diversification to work
Often compared to not putting all your eggs in one basket, diversification is the process of spreading your money across a variety of investments – for example, stocks, bonds, cash – that don’t all behave the same way during periods of market volatility. By including investments that have different reactions to economic trends and events – as one type of security falls the other should rise – you can help lower the impact of market declines on your portfolio
Invest automatically and take advantage of market ups and downs
Instead of fearing a market correction, consider viewing it as a buying opportunity. By contributing a fixed-dollar amount on a regular basis through a Pre-Authorized Contribution (PAC) plan, you can take advantage of the market dips by purchasing more fund units when your dollar goes farther and in turn, lowering your average cost.
Focus on the big picture
When looking at historical rates of returns, don’t focus solely on the upside. Although it’s practically impossible to forecast when the next upward or downward spike in the market will take place, having a well thought out investment plan can help provide a sense of confidence that you can ride out the volatility.
Keeping an eye on the long-term strategy will ultimately help keep you on the road during the short-term bumps and turns.
Working through some of your concerns, either on your own or with an advisor, can allow you to make informed investment choices, view your portfolio with more calm, and ultimately help keep you on track to meet your financial goals.
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