Handling market volatility

Investing and Retirement Planning 

Conventional wisdom says that what goes up must come down. But even when you know market volatility’s a normal sign of a healthy market, it can still be tough to handle. After all, it's your money at stake. And while there's no foolproof way to handle the ups and downs of the stock market, the following common sense tips can help.

Don't put your eggs all in one basket

You’ve heard it a thousand times, but diversifying your investment portfolio is one of the best ways to soften the impact of market volatility. Asset classes often perform differently under different market conditions. So spreading your assets across a variety of different investments such as stocks, bonds, and cash alternatives like money market funds, CDs, and Treasury bills has the potential to lessen your overall market risk. Often, a decline in one type of asset will be balanced out by a gain in another, though diversification can't guarantee a profit or eliminate the possibility of losses.

One way to diversify your portfolio is through asset allocation. Asset allocation involves identifying the asset classes that are appropriate for you and allocating a certain percentage of your investment dollars to each class (e.g., 70% to stocks, 20% to bonds, 10% to cash). One easy way to decide on an appropriate mix of investments is to use a worksheet or an interactive tool that will suggest a model or sample allocation based on your investment objectives, risk tolerance, and investment time horizon.

Focus on the forest, not on the trees

As the market goes up and down, it's easy to become too focused on day-to-day returns. Instead, keep your eyes on your long-term investing goals and your overall portfolio. Although only you can decide how much investment risk you’re comfortable taking, if you still have years to invest, don't overestimate the impact of short-term price fluctuations on your portfolio.

Look before you leap

When the market goes down and investment losses are mounting, you may be tempted to pull out of the stock market altogether and look for less volatile investments. Even the small returns that typically accompany low-risk investments may seem very attractive when riskier investments are posting negative returns.

But before you leap into a different investment strategy, make sure you're doing it for the right reasons. How you allocate your investments should always be consistent with your goals and time horizon.

For instance, putting a larger percentage of your investment dollars into vehicles that offer safety of principal and liquidity (the opportunity to easily access your funds) may be the right strategy for a short-term investment goal (e.g., you'll need the money soon to buy a house) or a long-term goal like retirement that’s getting close. But if you still have years to invest, even though past performance is no guarantee of future results, remember that stocks have significantly outperformed stable value investments over time. If you move most or all of your investment dollars into conservative investments, you’ll just be locking in any losses you might have, while at the same time sacrificing the potential for higher returns.

Look for the silver lining

A down market, like every cloud, has a silver lining. And that silver lining is the opportunity to buy stock shares at lower prices.

One of the easiest and most effective ways you can do this is by employing a ‘dollar cost averaging’ strategy. Rather than trying to time the market by buying shares when prices are at or near their lowest, dollar cost averaging doesn’t worry about price at all. Instead, you invest the same amount of money at regular intervals over time.

When prices are high, your investment dollars buy fewer shares. But when prices are low, the same dollar amount buys you more shares. Although dollar cost averaging can't guarantee you a profit or protect against a loss, over time a regular fixed dollar investment may result in an average price per share that's lower than the average market price, assuming you invest through all types of markets.

Want to make dollar cost averaging work for you?

  • Get started as soon as possible. The longer you have to ride out the ups and downs of the market, the more opportunity you’ll have to build a sizeable investment account over time.
  • Stick with it. Dollar cost averaging is a long-term investment strategy. Make sure you have the resources and discipline to invest continuously through all types of markets.
  • Take advantage of automatic deductions. Having your investment contributions deducted from your paycheck or bank account is easy and convenient, and can help you get in the habit of investing regularly.

Don't stick your head in the sand

While focusing too much on short-term gains or losses is unwise, so too is completely ignoring your investments. Make it a point to ‘check in’ on your portfolio at least once a year—more frequently if the market is especially volatile or if you’ve experienced significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance, or shift your allocations to better suit your current needs. Your Truist advisor can help you decide which investment options best align with your goals.

Don't count your chickens before they hatch

As the market recovers from a down cycle, elation quickly sets in. If the upswing lasts long enough, it's easy to believe that investing in the stock market is a sure thing. But, of course, it never is. As many investors have learned over the years, becoming overly optimistic about investing during the good times can be as harmful as worrying too much during the bad times. The right approach during all kinds of markets is to be cautiously optimistic but realistic. Have a plan. Stick with it. And strike a comfortable balance between risk and return.

Now’s the time to make sure your portfolio is well-structured to address any volatility that may be on the horizon.

Contact a Truist Wealth Advisor