The stock market has been a wild ride with the uncertainty of the COVID-19 pandemic, and periods of volatility can be a wake-up call to assess your portfolio. But investors who are focused on long-term goals shouldn’t let short-term movements sway their decisions. On the other hand, investors who are nearing or in retirement may need to add defensive assets for stability.
It’s important, especially in times of market volatility, to stay focused on your financial plan and make decisions based on your goals and timetable, as opposed to emotions or panic. Navigating through rocky markets can be tough, but following proven investing principles can help you stay the course.
Here are some principles to keep in mind:
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Diversify your portfolio
Portfolios that are highly concentrated in just a few securities can be very risky. Having investments spread across different asset classes, such as stocks, bonds and cash, is important because each can respond to movements in the overall stock market differently. It’s not always the case, but when one is up, the other can be down. Having the right mix can help mitigate the impact of volatile markets.
Tip for investors: Ask yourself these questions:
- Does your portfolio’s success depend too heavily on the performance of any single investment?
- Are your holdings concentrated in a single industry, sector or country?
- Are you less diversified than you think because different funds in your portfolio hold many of the same securities?
2. Determine your risk profile
Investing involves taking risks, and you have to be honest about how much risk you’re willing to take with your money. Determining your risk tolerance informs how you should diversify your investment portfolio between stocks, bonds and cash. A larger allocation to stocks or funds that hold stocks can yield higher potential performance over the long term, but it also generally comes with higher potential risks.
Tip for investors: Do you need your portfolio to generate income now or in the near future? If your goals are short-term, consider lower risk. If your goals are longer-term, you have time to withstand and recover from volatility.
Another tip for investors: Can you tolerate fluctuations in the value of your investments, financially and emotionally? If not, you might want to consider a lower-risk portfolio regardless of your time horizon.
3. Take the long view
In times of severe market volatility, the fluctuations may feel disastrous. However, emotional reactions to short-term market conditions can put you at risk for further financial losses. Markets typically go up and down, and even bear markets historically have been relatively short. According to the Schwab Center for Financial Research, the longest bear market was a little less than three years (915 days), and it was followed by a nearly five-year bull run.
Tip for investors: Timing the market’s ups and downs is impossible – instead, stay diversified, know your risk tolerance and stick to your plan during tough times. For long-term investors, the strategy should be time in the market rather than timing the market.
4. For those nearing or in retirement, your approach to volatility may look different
If you’re nearing or in retirement, you likely want to tap at least some of your portfolio in the short term, so for that money you don’t have the luxury of time to recover from a market downturn. And that can be stressful. Having money needed in the short term allocated to more defensive investments can help stabilize those assets when stocks are slipping.
Tip for investors: If you expect to withdraw from your portfolio within the next four to five years, it’s a good idea to hold those funds in assets that are relatively liquid and historically have been less volatile than stocks, such as cash and short-term bonds. What you want to avoid, if possible, is being forced to sell more-volatile investments at a loss in order to fund short-term financial goals.
Market volatility can be a true test of an investor’s risk tolerance and ability to stay the course. A financial plan can help. If you don’t have a financial plan, now is a good time to create one to see you through different market environments now and in the future.
Investing involves risk including loss of principal. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
©2020 Charles Schwab & Co. Inc. (“Schwab”). All rights reserved. Member SIPC.
-
The Most Tax-Friendly States for Investing in 2025 (Hint: There Are Two)State Taxes Living in one of these places could lower your 2025 investment taxes — especially if you invest in real estate.
-
Want To Retire at 55? See If You Can Answer These Five QuestionsWho said you can’t retire at 55? If you say yes to these questions, you may be on your way to an early retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your WalletInterest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your InvestmentsDon't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.
