Four Basic Strategies for Managing Risk
Most folks can get reasonably comfortable with some level of risk and the ups and downs of market volatility by using four basic investment strategies:
Focus on the long term
Diversify your investments
Keep in touch with your financial advisor
Focus on the long term. One key to living with market volatility is focusing on long-term results rather than the daily bumps along the way.
That can be especially difficult during prolonged market declines fed by daily injections of bad news. Investors living through the aftermath of the market bubble that burst in August 2008 were acutely aware of how challenging it can be to stay focused on the long term.
Diversify your investments. No one asset category does well all the time, so it can be a good idea to put your eggs in a variety of baskets. If some of your investments are down, others may be up.
One area of the market can be hot for several years, like large U.S. growth stocks in the second half of the 1990s. During those years, owners of diversified portfolios may not have had much to say when friends bragged about outsized returns in their 100% growth stock portfolios. But the market free fall that started in August 2008 underscored the value of diversification as a strategy for living with volatility’s downs.
Invest regularly. Also called dollar-cost averaging, an automatic investment program can be an excellent strategy for living with volatility’s downside and taking advantage of its upside.
You don’t need to worry about the best time to invest when you put away the same amount every month, but like most investing strategies, it doesn’t guarantee a profit or protect against loss in declining markets.
This strategy can help reduce anxiety about portfolio declines. The bright side of a down market is that you’re buying shares at bargain prices. However, this strategy requires you to continue investing through both the ups and downs. Before starting a dollar-cost averaging plan, consider your ability to continue buying shares through prolonged market and economic slumps.
Keep in touch with your financial advisor. Our last strategy for putting volatility in perspective may be the most important. Financial advisors are trained to focus on your financial goals, your time frame and your comfort with volatility.
Articles like this one can tell you what volatility is and provide some time-tested strategies for coping when investment values fall, but they can’t meet your personal needs as effectively as a personal financial advisor.