Managing investments
Keeping cool may be hard to do when the market goes on one of its periodic roller-coaster rides. It may be useful to have strategies in place that prepare you both financially and psychologically to handle market volatility. This brochure discusses 11 methods investors may wish to use to prevent themselves from making hasty decisions that could have a
long-term impact on their ability to achieve financial goals.
1. Having a game plan
Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating decisions. A core-and-satellite approach combines the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. Diversification may also be used to try to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or guarantee against a loss, but it can help balance your risk in advance. If you’re an active investor, a trading discipline may help you stick to a long-term strategy. Some investors decide to determine in advance to take profits when a security or index rises by a certain percentage, and buy when it has fallen by a set percentage.
2. Tracking portfolio composition
When the market goes off the tracks, knowing why a specific investment was originally made can help investors evaluate whether their reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits in a portfolio can help investors determine whether a lower price might actually represent a buying opportunity.
If you don’t understand why a security is in your portfolio, you may want to find out. You may be able to use that knowledge when the market goes south to help you determine whether to replace your current holding with another investment.
3. Everything is relative
Most of the variance in the returns of different portfolios can generally be attributed to their asset allocations. If you’ve got a well-diversified portfolio that includes multiple asset classes, it could be useful to compare its overall performance to relevant benchmarks.
Even a diversified portfolio is no guarantee that you won’t suffer losses. But diversification may mean that if the S&P 500 drops 10% or 20%, your overall portfolio may not be down by the same amount.
4. This too shall pass
The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you’re considering changes, a volatile market may be an inopportune time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of good investment planning.
5. Learning from mistakes
Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best investors aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions. Expert help may be able to help prepare you and your portfolio to both weather and take advantage of the market’s ups and downs.
View the full article, Keep Your Cool in a Crazy Market.