Market Volatility: Unwelcome But Inevitable

Market Volatility: Unwelcome But Inevitable With the recent corporate accounting scandals contributing to what was already a volatile stock market, no wonder many investors are asking some difficult questions. "Is the market ever going to improve?" "Should I pull all my money out of the market?" "Can I ever trust corporate America again?"

Before you make any decisions, it is worth remembering that the U.S. financial markets are still regarded as among the most well run and monitored in the world and have long served as a model for other global markets. In addition, policy makers in Washington, DC have already passed a number of recent reforms to improve the system even more.

In the meantime, you may wish to consider the taking the following steps to help weather the market's volatility and rebuild your confidence as an investor.

Although it may be easier said than done, don't panic about the recent market volatility. The one certainty that we know about the stock market is that it will always experience ups and downs. There have been volatile years like this in the past and the market has always weathered the storm. It is important to keep emotions in check and not allow short-term corrections to influence your long-term investment goals. Look at a market decline as a buying opportunity.

Implementing a buy and hold investment strategy can help you remained focused. As the name implies, it's simply making an investment and holding on to it despite short-term market fluctuations. The opposite strategy is known as market timing, which is buying and selling investments frequently based on what you think the market will do next. As most financial professionals will tell you, market timing is risky. If your predictions are wrong, you could invest when the market is on its way down, or sell when it's on its way up. Therefore, you have the potential to miss the market's best days.

A systematic investment plan known as dollar-cost-averaging is another strategy used with volatile markets. Dollar-cost-averaging takes the emotion and guesswork out of investing. It is simply a strategy whereby you invest a fixed amount on a regular schedule-typically monthly. Because you buy more shares when prices decline and fewer shares when prices rise, your average cost per share may be less over time. Periodic investment plans do not assure a profit or protect against loss in down markets. These plans involve continuous investment in securities regardless of fluctuating price levels. Investors should consider their financial ability to continue purchasing through periods of high and low price levels.

If you haven't done so already, take a good look at you investments as a whole. Does your portfolio's asset allocation (your mix of stocks, bonds and cash equivalents) accurately reflect your financial goals, time horizon and tolerance for risk? Reviewing your asset allocation strategy can also help you answer another question about your portfolio-is it adequately diversified? In other words, have you spread your money among different investments to potentially help reduce risk?

Finally, consider tapping the expertise of a seasoned financial professional who has experienced market conditions like these before and can help you cope. A financial professional can make suggestions regarding portfolio mix, help put market news in perspective, and help you stay focused on your long-term financial goals. Remember, market volatility, although unwelcome, is inevitable. However, taking the steps outlined above may help ease the pain just a little and allow you to stay focused on your long-term goals.

Advisor is an independent financial planner based in Manchester, NH