There is no question that stock markets are volatile right now and they likely won’t calm down anytime soon. When markets get choppy, it pays to have a plan for your investments, and to stick to it.
A natural reaction to volatility is to allow fear to cloud your better judgement and reduce or eliminate exposure to stocks thinking that will stem further losses and calm your fears. In the long term however, this generally doesn’t make any sense.
In the past, what seemed like some of the worst times to get into the markets turned out to be many of the very best. The top five-year return in the US stock market began in May of 1932, in the midst of the great depression, which produced a return of +367%. In the five years following July of 1982, which was during the worst recession in recent history, the US markets provided a return of +267%. Following the “great recession” of 2008-2009, the five-year return starting in March of 2009 was +178%.
Long story short, it pays to stay invested during the more turbulent times.
You do however need to make sure that you are properly prepared for the volatility. Here are a few tips on how to do just that:
Have a strategy – Your investment plan must align your risk tolerance with your personality, time horizon and goals. It’s imperative to look at the big picture with all these various components weighed in, to make sure that your investment strategy is something that works for you.
Be comfortable – If you find yourself nervously checking your computer each morning to see how your portfolio has fared, you might not be in the right investments. Even if your time horizon is long enough to warrant some more aggressive positions, you must be comfortable with the shorter-term volatility that these investments can bring.
Get Diversified – Many people think that their portfolio is well diversified but in reality, they just hold a whole lot of the same thing. Many investment accounts hold a big basket of Canadian stocks or 10 different Canadian balanced mutual funds and the investors don’t realize that these assets are all mostly the same thing. One of the best ways to manage volatile markets is to properly diversify across different sectors, geographical locations and asset classes. To do this, you have to go global.
Don’t time the market – While very tempting and profitable if you are right, timing the market proves to be very costly for most. The old adage of “buy low and sell high” makes sense but very few people successfully pull it off. You would be far better off to simply stay invested for the long haul. Often, the biggest growth periods for stock markets occur in very short periods and if you miss them, your returns will suffer greatly. $10,000 invested in the US market on January 1 1980 would have been worth $503,741 on March 31st 2015. If you missed out on only the 30 best days during that entire time, your account would be worth only $90,573!
Benefit from the volatility – In addition to staying invested during good times and bad, you can actually help yourself benefit from increased market swings. A simple, time-proven technique called dollar cost averaging can help you take advantage of volatility. With this strategy, you invest a set amount every week or month regardless of how the market is doing. Over the years, you will buy more shares or units of each investment option when prices are low and fewer shares when prices are high. As a result, you end up with a lower average price per share in your total portfolio. More importantly, you resist the temptation of trying to time the market with your contributions.
To help ease the pressure and stress of managing your investments during highly volatile times, make sure you have a good investment plan and that you stick to it. A Certified Financial Planner professional can help you build a sound plan and make sure that you stick to it once built, so that you can achieve your financial goals and a good night’s sleep at the same time.
This column is written by Michelle Weisheit CFP, IG Wealth Management and presents general information only and is not a solicitation to buy or sell any investments.
Please contact your own advisor for specific advice about your situation.