In recent months, stocks have fallen sharply from their record highs, with one-day drops that can rightfully be called “dizzying.” As an investor, what are you to make of this volatility?
You may find it useful to know the probable causes of the market gyrations. Most experts cite global fears about China’s economic slowdown and falling oil prices as key factors.
But what should you do?
Expect more of the same. Be prepared for more volatility, potentially including big drops one day followed by big gains the next. Until the factors considered responsible for the current volatility – that is, China’s slowing economy and low oil prices – have been fully absorbed into the market’s pricing mechanisms. Big price swings, one way or another, are to be expected.
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Don’t panic. The headlines may look grim, but today’s newspapers are tomorrow’s recycling pile. Volatility is nothing new.
Look for opportunities. A downturn occurs when investors sell large amounts of stocks. It might be a good time to consider buying, while stock prices are down. Look at the most successful businesses and their products and services. If you can envision these companies thriving in ten years, you may want to consider buying their stocks at potentially lower prices.
Diversify. If your portfolio took a particularly large hit during the downturn, it might be because your holdings are over-concentrated in stocks, especially the types of stocks that fared the worst. Review your portfolio with your financial advisor. Diversification, by itself, can’t guarantee a profit or prevent against all losses, but it can help blunt the harshest effects of volatility.
Review your investment strategy. Unless your goals have changed, there’s no reason to revise your long-term investment strategy, even in the face of wild fluctuations in the financial markets. Still, it’s always a good idea to review your strategy at least once a year, possibly in consultation with a financial professional. You may need to make smaller-scale adjustments in response to changes in the economy, interest rates, and so on, but don’t abandon your core principles, such as maintaining a portfolio that reflects your goals, risk
tolerance and time horizon.
Investing will never be risk-free or predictable. But you can relieve some stress and stay on track toward your financial objectives. Past performance does not guarantee future results. Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk.
Deborah Leahy is an investment adviser with Edward Jones, member CIPF.