Your Investments: Three tips to deal with stock-market roller-coaster ride

If the violent swings are too much for you, here are three investing tips that may help you remain sane during market downturns.

By AARON KATSMAN
October 29, 2014 21:27
3 minute read.
House and calculator [Illustrative].

House and calculator [Illustrative].. (photo credit: INGIMAGE)

 
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Do you have that sick feeling in the bottom of your stomach? The recent wild stock-market ride has certainly jarred investors out of a place of complacency. The sudden 10 percent drop followed by an almost equally fast snapback has made many an investor a nervous wreck. If the violent swings are too much for you, here are three investing tips that may help you remain sane during market downturns:

Diversify

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To understand this concept more easily, we first need to define the meaning of diversification. 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 layman’s terms, don’t put all your eggs in one basket. It’s important to remember that diversification does not assure against a loss.

If you include bonds or FDIC-insured certificates of deposit (CDs) in your stock portfolio, it may take away some of the volatility of the portfolio, allowing for potentially more stable returns over the long run.

Don’t panic

Keep you eyes glued to your long-term goals. It’s important to remember that markets go up and down, and 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. The market 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.

Rebalance



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. 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 first decide to invest, you decide that an allocation of 70% stocks and 30% bonds seems right for your $100,000 portfolio. We can also assume that over the course of the past few years, the stock market moved significantly more than the bond market.

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 a lot more than the initial $70,000. On the other hand, your bond holdings would be worth little 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 would unfortunately have also become riskier. The reason for this is because the portfolio would move from being a 70% stock and 30% bond allocation to an allocation of 80% stocks and 20% bonds. In this situation, if you don’t rebalance and you have a riskier portfolio, when the market starts to drop, this could lead to a greater loss.

It is a good idea to implement these three tips, as they are a possible means to help you weather the storm of volatile markets.

Past performance is not a reliable indicator of future results.

The S&P 500 index measures large-cap stocks and US stock-market performance of leading companies in leading industries. An investor cannot invest directly in an index.

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@lighthousecapital.co.il

Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.

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