Many investors need equity returns to build wealth over the long term. Unfortunately sometimes investors find it difficult to endure the sharp declines and volatility that is often experienced in the capital markets. As an investor, one should understand that risk is necessary to pursue higher returns. However, the correlation between risk and reward illustrates that higher returns, more often than not, experience higher volatility. This leads to the important subject of how to react in a turbulent environment.
For an investor safety is as important as growth. Prudent risk management therefore requires that one addresses the possibility that a "Bull" market could turn "Bearish" at any time. One’s portfolio needs to be
prepared should unfriendly market conditions occur. During turbulent times in stock markets investors are looking for answers about what they should do. The answers however, depend upon just who is asking the questions. If the questioner is a speculator who buys and sells stock with the focus on their momentary prices then it may be difficult to offer a solution as successful market timing is near impossible. If on the other hand, the question is coming from a long term investor, there are quite a number of ways to prepare for turbulent times.
It’s important not to let market uncertainties affect financial planning for the years ahead. Individuals who stop their investment planning, particularly during market downturns, can often miss out on opportunities to invest at lower prices. Nobody has all the answers to why the market takes a nosedive, but it’s often useful to take a look at the economic precursors that may play a role in market turbulence.
Uncertainty is a constant, and downturns happen frequently. But market setbacks have typically been followed by recoveries. An investor should stay disciplined as trying to time the market has proven challenging and costly. An investing approach built with one’s goals and situation in mind may help one cope with short-term volatility. Instead of being worried by volatility, be prepared. A well-defined investing plan tailored to one’s goals and financial situation can help one be ready for the normal ups and downs of the market, and to take advantage of opportunities as they arise.
Attempting to move in and out of the market can be costly and the decisions investors make about when to buy and sell can cause investors to perform worse than they would have, had the investors simply bought and held the same investments. If one invests regularly over months, years, and decades, short-term downturns will not have much of an impact on the ultimate performance.
If one keeps investing through downturns, it won’t guarantee gains or that they will never experience a loss, but when prices do fall, they may actually benefit in the long run. When the market drops, the prices of investments fall and the regular contributions allow one to buy a larger number of shares.
Finally, if the movement of the markets have changed your mix of large-cap, small-cap or the mix of stocks, may need a rebalance to get back to the target asset mix. That could provide a disciplined approach that helps one take advantage of lower prices.
Rather than focusing on the turbulence, wondering whether you need to do something now or wondering what the market will do tomorrow, it makes more sense to focus on developing and maintaining a sound investing plan. A good plan can help you ride out the peaks and valleys of the market and may help you achieve your financial goals. You can battle quick sand with quick thinking.
These strategies can be complex, and you may want to consult a professional before making any investment decisions.