Advice for Long-Term Investors in Volatile Markets

When market volatility  hits, it’s easy to get nervous. You may see the value of your retirement accounts decrease or hear chatter on the news about economic downturns. Don’t panic. 

Why Should You Stay Invested During Market Volatility?

While past performance is never an indication of the future, historically the markets have been resilient. After each drop, they bounce back and continue an upward trajectory. Because most people are investing for retirement, which is long-term, fluctuations in the market over the course of a week, month or year don’t make-or-break their retirement savings. What matters most is being appropriately invested for their risk tolerance and timeline. 

What to Do During Volatile Markets

The last thing you want to do during a downtown is pull that money, turning the drop in your portfolio into a real lose and missing the opportunity to be part of the rebound. Stay invested during volatile markets so you can keep moving in the direction of your dreams – and keep these age-old adages in mind.

1. Diversify Your Portfolio

Wisdom: Don’t put all your eggs in one basket.

Having a diversified portfolio can help protect you from market downturns because investments react to market pressures differently. When you have many different types of asset classes (such as stocks, bonds, real estate and cash), an event that causes one asset class to drop in value may have minimal impact (or the opposite impact) on another asset class. Similarly, investing in different types of industries can give you a layer of protection. 

The choices you make when you diversify your portfolio should be rooted in your risk tolerance. By knowing how much risk you feel comfortable with, applying that to your investments and ensuring you have a mix that accurately reflects your desires, you can feel confident that you have a strong defense against volatility. 

1. Don’t Focus on Day-to-Day Fluctuations

Wisdom: Don’t miss the forest for the trees.

If you’re watching the markets’ every move, you may get caught up in day-to-day fluctuations and lose sight of the long-term nature of your investments. Focusing on the ups-and-downs of daily activity doesn’t give you a good picture of your overall portfolio health or potential future returns; unless your goal is to worry, one of the best ways to keep yourself calm as you navigate volatile markets is to stop looking so closely and continue to stay the course with your investments.

1. Exercise Caution When Changing Your Investment Strategy

Wisdom: Look before you leap.

If you find that your current investment strategy isn’t meeting your long-term needs, wait to make changes until you can do so in a market environment that is less stressful. Making changes during a downturn locks in your market loss and drives decision-making during a time when the market may not accurately reflect the norm. Before you alter your investment strategy, ask yourself these questions. If the only reasoning behind your desired change is fear about the market’s performance, the best action may be inaction. 

1. Take Advantage of the Down Market

Wisdom: Look for the silver lining.

While your gut reaction to a market downturn may be recoiling, these dips actually give you an opportunity to invest in a bear market. Purchasing assets when the prices are down may give you more bang for your buck. This is actually common practice for most people who invest with a 401(k) or IRA; when your monthly contribution is withdrawn, it is used to buy assets, regardless of the market conditions. Sometimes prices are high and other times they are low. Overtime, this disciplined approach to investing increases your efficiency and could bring down your cost per asset. 

1. Adjust Your Expectations of Market Patterns

Wisdom: Don’t count your chickens before they hatch.

When the market recovers – or when there is a bull market – value of your portfolio, as well as the price of assets available for purchase, rise. People typically feel confident and optimistic, but don’t get too caught up in the excitement. This is also a time to hold steady and stick to your long-term investment plan, continuing to contribute and make small adjustments to your portfolio as needed.

1. Regularly Review Your Portfolio

Wisdom: Don’t stick your head in the sand.

Market changes – in whatever direction – can throw off the distribution in your investment portfolio. Imagine this: you have allocated 70% of your monthly retirement contribution to stocks, while the rest goes to lower-risk investments. The stock market went through a dip over the last year, meaning stock prices have been low. Your purchasing budget has gone further, and your portfolio is now 82% stocks. Your investment portfolio is no longer accurately aligned to your risk tolerance: it’s time to rebalance your portfolio. Not only does this readjustment mean your portfolio will continue as you intended, selling high-performing assets locks in those gains and allows you to re-deploy those funds to assets that better reflect your intentions. 

It is critical to keep an eye on your portfolio so you can make adjustments when they become necessary. For many people, once a year or whenever their asset allocation drifts more than 5% off their original intended mix is a good rule of thumb. Major life changes – such as a birth or job change – may also justify a portfolio review.

Don’t Do It Alone

Investing for the future can be a bumpy path, but you don’t have to do it alone. A Farm Bureau financial advisor can help you make the best choices for you and your family.