Market Volatility: 4 Steps to Help Protect Your Investments

A lot is going on in the world right now that has investors talking about market volatility, corrections, and even recessions. The COVID-19 pandemic continues, and inflation is at a 40-year high. Now we have Russia’s war on Ukraine and rising gas prices. Meanwhile, the U.S. Federal Reserve has pivoted from planning no interest rate increases to a series of interest rate hikes.

Although bonds have recently responded with volatility, the stock market has been less affected. Yet stock volatility has happened—and frankly, it’s almost a given that it will happen again. Market ups and downs are a fact of life for investors. And since none of us can control volatility, it’s important that we take steps to safeguard our assets.

Although the following steps won’t prevent losses, they can help mitigate their impact. They can also help position you for long-term success in achieving your financial goals.

Here are four steps to help prepare for market volatility:

1. Diversify Your Investments

It’s tempting to go all-in on hot stocks. But what happens if those same stocks drop? If you put all your money toward them, you’re likely to lose more money than someone who owns a range of assets. Read this article on the dot-com crash for a refresher on the damage that owning too much of one thing can do.

An appropriately diversified portfolio that you regularly rebalance could help you reduce your losses because not all equities are likely to drop so precipitously at the same time. Some may even rise, helping to offset the damage.

Ideally, your portfolio will pull from various asset types, countries, industries and sectors, and market capitalizations. Consider talking with a fiduciary financial advisor about the appropriate portfolio for you.

2. Have a Long-Term Plan

Having goals for your investments can help you make informed buy-and-sell decisions. Say you want a certain amount of savings for retirement. You can use that long-term goal for investment decision-making. Your plan can help provide structure and also help you avoid decisions made out of FOMO (fear of missing out) or fear.

3. Know Your Risk Tolerance

Your risk tolerance is your ability to handle risk. When markets get volatile, you may feel tempted to sell everything and get out. Creating a portfolio that supports your tolerance for risk can help you avoid emotional decisions that hurt you and instead stick to your plan.

The amount of risk you take in your portfolio should generally change as you age. You’ll likely want to own fewer equities as you approach retirement. Our Greenwood Village, CO retirement planning firm helps clients determine the appropriate allocation based on their retirement timeline, risk tolerance, financial situation, and other factors.

4. Take Advantage of Market Movements

When the markets drop, consider contributing to your retirement accounts, such as your 401(k) or IRA, as scheduled. Doing so enables you to buy equities while they are discounted. Otherwise, you can sit tight and wait for the market to climb again.

If you have the cash and the desire, you can look for opportunities, such as investing in companies whose stock prices have dropped. However, do your research to help ensure that the company’s fundamentals are strong and that the stock fits into your long-term plan and asset allocation strategy.

Final Thoughts

Market drops will happen, but they shouldn’t keep you up at night. By owning an appropriately diversified portfolio in line with your time horizon and risk tolerance, you take steps to help protect yourself against short-term market moves.

Knowing that you have taken these steps can help you avoid panic selling and other financially destructive behavior when markets get choppy. Instead, you can make informed decisions about any buying decisions while you patiently wait out the variability.

We offer a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.

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