Investing in the stock markets can sometimes seem like an exercise in patience and nerves. Investors hate uncertainty and therefore, so do the stock markets.
It’s normal and natural to want to react to what we see and hear around us, however if one plans to remain invested it’s vital to stay levelheaded. Here are a few tactics for navigating turbulent markets.
Understand your investments
Investors should always only buy investments that they are familiar and comfortable with. When buying mutual funds, one should know if the fund is fixed-income, balanced or equity. They should also know if the fund is investing for growth or income, and what sectors the underlying stocks are primarily from.
When buying individual stocks, investors should understand the business entirely: what it does, what its prospects for growth are and the condition of its financial statements. This helps people to determine how comfortable and confident they feel about investments they are making, and how assured they feel about the company’s continued performance. This is the most important thing a person can do to help keep a cool head during tumultuous times in the market.
Limit media influence
The adage “Don’t believe everything you hear” is an important investing lesson. When navigating the stock market, it’s vital to be able to put what you see or read into context. Remember that television, print and online media are usually funded by advertising dollars, which can influence what is presented. In other words, media is big business with its own interests, which could be at odds with what’s best for investors.
Volatility and loss
Another skill is being able to recognize the difference between an actual loss and normal market volatility. When a portfolio experiences a decline in value, it does not necessarily mean there has been a loss. If a portfolio is well diversified and comprised of high-quality assets, the investor should consider continuing to hold the investments. It is likely that this type of portfolio will recover when market stability returns. If a person decides to sell, they might end up selling their investments for a lower price than they paid, thus truly realizing a loss.
Markets are dynamic and will always ebb and flow with the economy. Movement is what creates opportunity. If there is no down, there can’t be an up, either. Learning to accept the downs and viewing them as a potential opportunity is an important component of investing.
Most people invest with specific goals in mind: retiring early, buying property or funding children’s post-secondary education. It is likely that when these goals were identified, a reasonable path to attaining them was set. This is especially true for those who work with a financial advisor.
When dealing with the ups and downs of the markets it’s important to stay focused on goals, and to push aside any tempting emotionally-motivated actions. Over the short-term, markets can be quite volatile. Over the long-term, a dive in the overall stock market has never been irreversible. This was true during the Great Depression and every economic event since. As a rule, an upward trend in the general stock markets continues over time while declines are only temporary. Again, this is why it is important to own high-quality assets, as those tend to have a high probability of recovery.
Some people handle doubt by reacting, and in many cases this behavior can be detrimental to their investment portfolios.
It’s always in your best interests to talk over any concerns about the markets or your portfolio with your advisor. He or she needs to be aware of how you are feeling to determine if your investments are still suitable and recommend appropriate changes, if any.