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Strategy
Five Steps that May Turn the Market’s Ups and Downs to Your Advantage
By Michael Luftman
Senior Financial Planner, Scher Financial Group
The market goes up, and the markets go down. But what steps can you take when the market becomes more volatile than usual? Should you take all your money out and cut your losses? Or, wait things out?
These five steps can help you turn the volatility of the market to your advantage.
Step 1: Diversify
Allocating money among different asset classes – stocks, bonds, cash, and fixed interest – can help buffer the effects of market volatility because gains in one asset class may offset losses in another.
Step 2: Stay Focused on the Long Term
Although the stock market may be volatile in the short term, those who remain invested over the long term have generally been well rewarded. Frequent buying and selling, however, not only increases your market risk, but also increases your chances of locking in a loss, as many people tend to sell after the markets have declined. Stay the course – stick to your original investment plan. If you stay invested for the long term, your patience will more than likely pay off.
Step 3: Maintain Realistic Expectations.
The market of the late 1990s was exceptionally bullish, meaning that investors were very optimistic and shares of stocks were selling at all-time highs. However, the market, as is its nature, “corrected” itself, bringing many prices down to realistic numbers. Numbers that better reflected the value of the companies the stocks represented. This meant losses for those investors who learned a hard lesson.
Step 4: Rebalance Your Portfolio
Over time, your portfolio’s original asset allocation – how your assets are diversified – will change in value. Rebalancing is simply returning you investments to the asset allocation you originally chose. For example, if the value of stock holdings increases in relation to the bond/fixed interest holding in your portfolio, rebalancing will reduce market exposure by shifting money out of stocks. Be sure to consult with your tax adviser regarding possible tax considerations. Periodically review your investments and rebalance your portfolio. By doing this you can potentially increase returns and reduce market risk.
Step 5: Invest Regularly
Dollar cost averaging* is an investment strategy that encourages you to invest the same amount of money on a regular basis, regardless of market conditions. By following this strategy, you can avoid making a major investment when prices are at their peak or from missing a buying opportunity when prices are low.* Dollar cost averaging can actually lower the average price of the investments you purchase.
Your financial professional can work with you to examine your portfolio as it relates to your tolerance for risk and can suggest an appropriate plan that can help you to reach your investment goals by turning the market’s ups and downs to your advantage..
*Dollar cost averaging involves continuous investments in securities, regardless of price. You should consider your financial ability to continue to purchase units during periods of high and low prices. It does not assure a profit or protect against a loss.
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