Market volatility may leave you wondering how it will impact your investments. Here are six tips to consider as you design your asset management and investment strategy.
Diversification and asset allocation
Because asset classes often perform differently under different market conditions, spreading your assets across a variety of different investments such as stocks, bonds, or money market funds helps you manage market volatility and overall risk. Ideally, a decline in one type of asset will be balanced out by a gain in another.
One way to diversify your portfolio is through asset allocation. Asset allocation is a strategy that spreads your investments across different asset classes by identifying what is appropriate for you based on your goals. For example, you could allocate 70% of your investment to stocks, 20% to bonds, and 10% to cash alternatives. No one mix of assets is right for everyone. Your strategy should be tailored to your unique circumstances.
Think long term
As the markets go up and down, it’s easy to become overly focused on day-to-day returns. Instead, keep your eyes on your long-term investing goals and your overall portfolio. Only you can decide how much investment risk you can handle. If you still have many years to invest, don’t overestimate the effect of short-term price fluctuations on your portfolio.
Avoid acting impulsively
When the market goes down and investment losses pile up, you may be tempted to pull out of the stock market altogether and look for less volatile investments. Before you leap into a different investment strategy, make sure you’re doing it for the right reasons and considering your goals and time horizon.
If your investment goals are short term, safety of principal and liquidity may be your best bet. However if you still have years to invest, stocks have historically outperformed stable value investments over time. If you move most or all of your investment dollars into conservative investments, you’ve not only locked in any losses you might have, but you’ve also sacrificed the potential for higher returns.
Avoid over optimism
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. Of course, it never is. The right approach during all kinds of markets is to be realistic. Have a plan, stick with it, and strike a comfortable balance between risk and return.
The silver lining of a down market is the opportunity you have to buy shares of stock at lower prices. One of the ways you can do this is by using dollar cost averaging.
With dollar cost averaging, you don’t try to time the market by buying shares at the moment when the price is lowest. When the price is higher, your investment dollars buy fewer shares of stock. When the price is lower, the same dollar amount will buy you more shares. One of the most well-known examples of dollar cost averaging in action is a 401(k) plan, in which the same amount is deducted from each paycheck and invested.
While focusing too much on short-term gains or losses is unwise, so is ignoring your investments. You should check up on your portfolio at least once a year, more frequently if the market is particularly volatile, or when there have been significant changes in your life.
If you have any questions about investing, please feel free to contact Rahil Machiwalla at (925) 598-4718. He is available to chat by phone or he can meet you at any of the 1st United branches.
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Rahil Machiwalla, CUSO Financial Services, L.P.*
CA Insurance Number: 0G20361
CA Insurance Number: 0G20361
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*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the Credit Union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to Credit Union members. Please consult a qualified tax advisor for specific tax advice. View CFS Referral Disclosure