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?
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.
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 and stick to your original investment plan. If you stay invested for the long term, your patience will more than likely pay off.
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.
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.
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.
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