When the markets get choppy even the most level-headed investors have a tendency to start second guessing themselves and wonder where their investments will go in the future.
I’m no different – I can easily handle a rising market but a downturn starts to make me think twice about investing any more money. Who wants to catch a falling sword?
Here’s what I’ve learnt about handling volatility in the markets – what to do and what not to do.
Reviewing Your Investments
A downturn is a good time to take a step back and review the investments you currently have. Perhaps you have too much money in one industry and want to balance things out by investing in another industry to diversify your portfolio.
It also could be a good time to buy high quality companies at lower prices. I’m a fan of dollar cost averaging (to an extent) and buying when markets are low means you will lower your cost base. If you believed in the company enough to buy their shares when they are higher, it would make sense you’d be willing to buy more when they (temporarily) fall in price.
Evaluating Long Term Goals
A downturn is also a good time to take a look at your own long term goals. Where do you see your investments in 5-10 years and how does the current situation reflect that?
For me a downturn is a good time to reaffirm my long term goal of a sustainable monthly dividend income and market volatility doesn’t change that. In fact, I tend to buy when prices are low and ride out the market volatility while keeping in mind my long term plan to have a regular dividend income each month.
My long term goal is both dividend income and capital appreciation, and in times of market volatility I try to stay focused on those goals and tune out everything else. The markets go up and down and no one knows for sure where they are headed but in the long term I try to stick to my plan for achieving my goals.
One thing I try to avoid is timing the market. Like everyone else, I can’t predict what will happen in the future so I tend to avoid timing the market. I’ve tried timing before and was horrible at it so I don’t even bother now.
I do try to buy when prices are low but rather than selling I tend to hold for the long term. A sustainable monthly income is what I’m aiming for so selling wouldn’t allow me to achieve that. To be great at timing the market I’d have to pick the perfect time to both buy and sell – something I just can’t do most of the time.
I should mention that I do make the odd trade for small amounts which could be considered “timing the market”. However, the trades are usually equal to 2% of my total portfolio (or less) and I consider it separate from my main investments. For example I recently bought a stock at $2 and sold it for $3. A big gain since it was a matter of 1-2 weeks but not something I could repeat in the future, and I’m not willing to risk more than 3% of my portfolio using this strategy. Overall I’m much more comfortable holding for the long term and waiting it out than trying to guess the best time to buy/sell.
Making Emotional Decisions
Market volatility can be hard to take when listening to the media, who seem to blow everything out of proportion with the markets.
The media tends to make people start second guessing themselves and whether they are making the right decisions. It can be hard to not second guess yourself when the headlines start to look pretty grim.
In my opinion one of the worst things someone can do with their money is to buy/sell based solely on emotion.
Conclusion: when the markets get choppy I tend to ignore the “noise” made by the media and focus on my long term plan – sustainable dividend income
How do you handle market volatility?