Tip of the Day: You Should Mentally Prepare for Market Volatility
By: Stacey Nickens
Markets always fluctuate, but the world feels especially uncertain right now. While there’s been some positive economic reports, COVID-19 cases and deaths are still rising in many areas. You may be wondering what will happen to the stock market this fall. Unfortunately, we can’t know for sure. The market may dip again or continue to climb. Regardless, you can take steps to prepare for a market downturn. Doing so in advance will help keep emotions from dictating your decisions.
Even during market downturns, it’s important to maintain a diversified portfolio. Many companies and equities will remain strong regardless of the broader financial picture. For example, while the value of a bond may decline during a market downturn, the bond may continue to pay dividends. Indeed, the dividends you receive over years of owning a bond often exceed the temporary loss from the bond’s reduced value. In this COVID crisis, many companies also experienced an increase in demand for their services, especially companies that make it easier to work and entertain yourself at home. These positions thus make for a great investment right now, even when the broader market is experiencing hardship. With this in mind, it’s important that you plan to keep your money invested, and if you’re able, it’s important to continue to contribute to your retirement accounts. You don’t want to miss out on long-term gains due to fear.
Understand Your Financial Plan
Keeping your long-term goals in mind will make it easier to weather market volatility. Knowing what you’re working for in 10, 20, and 30 years will make temporary downturns feel smaller and less significant. Additionally, now is a fantastic time to reach out to me for a new risk assessment. A risk assessment will help us determine how much loss you’re willing to chance in order to experience more gains. By conducting a risk assessment, we can determine the best investment strategy for your portfolio. That way, when the market experiences a dip, you can feel confident about the manner in which your money is invested while also remaining focused on your goals.
Think About the Historical Perspective
When you’re consumed by the 24-hour news cycle, you may begin to feel anxious and hopeless. You may also be tempted to react immediately to sudden shifts in the market. However, historically, the market has rewarded the patient investor. Indeed, the market reacts negatively to many events, including historical illnesses such as SARS and the Avian Flu. Eventually, though, the market moved beyond these events and continued its upward trajectory. If you divest during one market downturn, you won’t reap the rewards that will likely come. Instead, you will have removed your money when you’re experiencing losses, and when the market begins to improve again, you will have to buy back in when equities are more expensive.
Prepare For Your Own Emotions
How do you usually feel during a market downturn? What is your impulse when you see bad economic news? Be aware of your emotions and emotional responses. You can then be better prepared to manage your anxiety in a way that doesn’t negatively impact your financial future. Prepare to manage your emotions, rather than react to them.
Use Market Volatility to Your Advantage
As I said above, there are always opportunities, no matter the broader financial situation. Market dips allow you to invest in high-quality positions that may be expensive during market upswings. You can also deduct investment losses in order to reduce your taxable income. It’s often said, but it bears repeating: When life gives you lemons, make lemonade.