(photo credit: REUTERS)
One thing we have lost, that we had in the past, is a sense of progress, that things are getting better. There is a sense of volatility, but not of progress. – Daniel Kahneman Here we go again.
North Korean nuclear test, a quickly slowing Chinese economy, Apple stock plummeting after iPhone production cut, rising interest rates. These are just some of the headlines over the last week. As a result, stock markets have started 2016 much like they ended 2015 – dropping.
If you are an investor, the best investment you could have made over the last seven to eight months was to buy a few bottles of Rolaids. With all the stomach-churning volatility that has symbolized the stock market over this period, the only relief has been some antacid.
All joking aside, to say that the last year has been a tough one for investors is an understatement. Globally, when referenced in US dollars, most markets are way down over the past 12 months.
But it’s not just losing a bit of money that has investors feeling jilted; rather it’s been the way markets have behaved that has chased more than one well-meaning investor from the stock market. Violent, day-to-day market movements have left investors wondering if there is any way to try and smooth out the ride.
This volatility is precisely why investors in the stock market need a long-term horizon, as well as to be able to withstand all of the market ups and downs.
Below are three investing tips that may help investors remain sane during market swings: Diversify
To understand this concept more easily, we first need to define its meaning. Diversification is an investment technique that uses many varied investments within a single portfolio. The idea behind it is that a portfolio of different kinds of investments may, on average, yield higher returns and pose a lower risk than a single investment.
Diversification tries to smooth out volatility in a portfolio caused by market, interest rate, currency and geopolitical risks. In laymen’s terms, don’t put all your eggs in one basket. It’s important to remember, however, that diversification does not assure against a loss.
If you include bonds in your portfolio, it may take away some of the volatility, allowing for potentially, more stable returns over the long run.
Keep you eyes glued to your long-term goals. It’s important to remember that markets go up and down; if you made a financial plan, it would have taken this type of market volatility into account. The worst thing you can do as an investor is panic and sell everything and then wait for the market to recover, because it tends to recover very quickly. Large market gains often come about in quick and unpredictable spurts, and missing just a few days of strong market returns can substantially erode long-term performance.
Remember the famous investing principle of buying low and selling high. Investors who panic often end up selling low.
The third principle is for investors to update or rebalance their investment portfolios.
Rebalancing is necessary for two main reasons. First of all, it keeps your asset allocation in line with your risk level and, secondly, it keeps your portfolio in line with both your short- and long-term goals and needs.
Let’s use the following example: When you begin to invest, you decide that an allocation of 70 percent stocks and 30% bonds seems right for your $100,000 portfolio.
We can also assume that over the last six to seven years, the stock market did very well and bonds were just okay.
Based on the assumption that all gains and dividends were reinvested and you didn’t deposit or withdraw any money, you would find that the stock portion of the portfolio would be worth much more than the initial $70,000.
On the other hand, your bond holdings also would be worth more than the $30,000 invested in them.
However, while it is true that over the last few years your portfolio, in this case, would have grown, it also would have become more aggressive. The reason for this is that the portfolio would have moved from being a 70% stock and 30% bond allocation to one of 80% stocks and 20% bonds.
In this situation, if you don’t rebalance you will end up with a more aggressive portfolio than you bargained for and, if the market drops, you will feel the pain.
Speak to your adviser about implementing these tips in order to lower your portfolios volatility.The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is a licensed financial professional Israel and the United States who helps people with US investment accounts. He is author of the book Retirement GPS: How to Navigate Your Way to a Secure Financial Future with Global Investing