Last Modified on August 7, 2020

Market volatility can be a matter of serious concern. Challenging market conditions affect the value of investments and often cause significant losses. Such as, in COVID-19, the S&P 500, Dow Jones, or Nasdaq saw a 10% fall until mid-March, 2020.  But, if there is a sound investment plan in place, market volatility usually is a temporary phase and the funds eventually recover. As is evident, the S&P 500 Index U.S. recorded a positive return in 24 out of 30 years considered in the research, despite the intra-year volatility. No one strategy can completely insulate you from a storming market. But wise planning can help sail through the challenging times.

Here are 5 effective strategies to make better investments during challenging market conditions:

1. Always take a long-term view

Volatility is a part and parcel of investments. But it is true that in dire events, the volatility of the market may increase manifold. Yet it is not an alarm to instantly act upon. While making investments, the goal is to reap returns in the long-run. Even though short-term profits may appeal to many investors, a long-term approach can be unparalleled. The S&P Composite Index depicts that short-term fluctuations are temporary hiccups and often settle in the long-run. While many might argue the earnings of active trading in the short-term,  the risks involved can offset the profits. Staying calm and holding on can be a good practice to follow. No matter how counter-intuitive it may seem, the focus is to build the long-term value.

Even looking back at data from 1930, Bank of America reported that if an investor missed on the S&P 500 10 best days of the decade, the returns would still be 91%. The figure is very low when compared to 14,962% returns for those who took the long-term approach. The COVID-19 phase can be considered the worst market since the 1930s. But there have been some good times too. The S&P index in March 2020 saw its four worst drops. But in the same month, the index also recorded its five highest point gains. That said, short-term volatility is upsetting and often creates notable numbers. But it helps to base your investment plan on a long-term viewpoint.

2. Stay diversified

Diversification is the key to security, especially in uncertain market conditions. Classified as the practice of distributing investments among various asset classes – diversification is the guiding investing principle. Diversification acts as hedging solution, which allows cross-investments across to cut risk and raise profits, without a need to time the markets. It spreads the funds across related and unrelated fields so that a bearish market does not impact the value. Each fund performs differently when conditions change, hence, accurate prediction is not possible. But, if the plan is diversified, the portfolio will most likely even out the risks and rewards. A diversified portfolio offers many stable returns than a directed one to a particular asset class.

All investments ideally follow a strategic asset allocation. This strategy focuses on different asset classes with varied risk profiles. Such as, a balance of equity which has higher risk and more reward, with bonds that have low risk but stable returns. The goal is to structure the plan according to your appetite, age, time horizon, and financial goal. You can establish your financial plan to include assets that are diversified as per asset classes – stocks, bonds, cash equivalents, etc. and asset categories – large-cap, mid-cap, small-cap, and growth and value funds. But, it helps to be mindful to not over-diversify. Over diversification stretches the portfolio beyond the optimal level of diversification. This can result in too many stocks, high cost, increased complexity, minimal risk-adjusted returns, and loss of high-performing assets.

3. Delay the short-term urge

The instinctive step for a wary investor in challenging times is to sell the investments and exit the market before it stoops even lower. Even though, many would suggest it is the ideal thing to do. When weighed with opportunity loss and long-term advantages, a short-term step might be a bad move. The goal is to enter the market when the time is right. But in reality, there never is a right time to exit or enter the market. A market will always face some volatility or the other. It is the investors who need to structure their strategies to make the most of it. When markets decline, the investors aim to sell their investments to avoid any further losses. But that move often results in locking of losses, as well as increases uncertainty over re-investing. No solid predictions can be made about the market. Hence, the change needs to be made at the end of the investor. Moreover, even in a low period, the market experiences positive bursts. Pulling out investments at this time may not only maximize losses but also lead to a potential opportunity loss. Hence, it is beneficial to curb the short-term urge and not fall privy to speculation and gambling.

4. Tap on the opportunities

As explained above, even though market volatility urges most people to pull out, it is wiser to stay invested in the long-run. In the middle of these low periods, markets often experience bursts of potential gain. Moreover, this is also a perfect time for a long-term investor to buy some more stocks. Due to a declining market, the stocks would be priced lower than otherwise. Buying good stocks at a low price during these times can sometimes provide substantial gains when the markets rise. Investment strategies such as dollar-cost averaging and rebalancing of portfolio combined with active risk management can provide fruitful results. Re-balancing involves selling asset classes that have performed well and then investing in under-performing ones. On the other hand, dollar-cost averaging involves investing a certain sum at regular intervals to gain advantages, irrespective of the market movement. Both strategies help to tap opportunities at the right time. They also ensure that the portfolio is sturdy enough to balance turbulent times.

5. Consult a financial advisor

Difficult times call for professional advice. An expert can help to ensure your investments do not suffer during challenging conditions. They have specific knowledge and experience in the field. Even though the expert cannot guarantee profits, there is a higher chance of tapping opportunities at the right time and actively balancing funds to minimize risk. Investing in consultation with professional advisors lets you stay focused towards the goal, adopt a long-term view, and minimize risks. The support also helps you maintain savings and invest tactfully in demanding times. You would be in a better position to understand the market, determine your financial situation, and benefit from the market recovery.

To sum it up

Challenging market conditions are even more significant in the current day and age. Unprecedented times such as the COVID-19 pandemic can sometimes cause investors to fall prey to speculation and fear. It can be useful to be prepared rather than expect how the market will behave and then act. It is very critical to have an investment plan that can withstand the not so favorable market swings. To ensure that you have a solid financial strategy for all times, you can consult a professional financial advisor.