Your Investments: Smooth out the stock market’s roller-coaster

If calm and a move from the roller-coaster to the calmer carousel sounds more up your ally, then here are three investing tips that may help you remain calm during market downturns.

By AARON KATSMAN
A man stands in front of an electronic board displaying market data at the Tel Aviv Stock Exchange (photo credit: REUTERS)
A man stands in front of an electronic board displaying market data at the Tel Aviv Stock Exchange
(photo credit: REUTERS)
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” – Warren Buffett
Okay, so here we go again. Volatility has returned to financial markets. Do you have that sick feeling in the bottom of your stomach? Many investors had been lulled into a sense of calm as global markets had moved higher month after month since the Trump election victory.
Then reality struck! All of the sudden, within days the US markets had dropped 7%, and headlines of an impending market crash were all over the media.
The fact is that maybe the market will continue lower and drop by 20% to 30%; there is no way to know. What is known is that if the violent swings are too much for you, keep you up at night and start making you feel sick, than being fully invested in stocks is probably a really bad idea.
If calm and a move from the roller-coaster to the calmer carousel sounds more up your ally, then here are three investing tips that may help you remain calm during market downturns:
Diversify
The first rule that investors need to know is that if you can’t afford to lose money investing in stocks, don’t invest in stocks. If you are able to lose some money, then you need to look at diversifying your portfolio. 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.
Never panic
This is my favorite. Just ask my kids. I am always preaching the need to stay calm and not panic in everything in life.
When it comes to your money, keep your eyes focused on 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 snap back quickly. Large market gains often come about in quick and unpredictable spurts, and missing just a few days of strong market returns can negatively impact long-term performance. You want to buy low and sell high. Investors who panic often end up selling low.
Rebalance
The third principle is for investors to 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: Let’s say that five years ago you decided to invest $100,000 with an allocation of 70% stocks and 30% bonds. Over the last five years the stock market performed very well, much better than the bond market.
If 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 a bit more than the initial $30,000 invested.
This means that over the last few years your portfolio would have grown nicely, but it also would have also become much more aggressive than originally intended. The reason for this is because the portfolio would move from being a 70% stock and 30% bond allocation to an allocation of 80% to 85% stocks and 15% to 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.