Investing is always a bit of a roller coaster. But in most cases, elevation changes are slow and steady. The market swells over the course of a few years, takes a brief corrective dip, and then surges again. We’re not used to the rapid ups and downs that we’re experiencing today – and that can be scary!
Proven Investing Principles for Volatile Markets
Prior to the COVID-19 outbreak, the United States had experienced a decade of unprecedented growth and economic vitality. And until late February, there had been no signs of any slowdown. But the rapid emergence of this virus has wreaked havoc on the economy.
From February 21 to February 28, the Dow Jones Industrial Average (DJIA) dipped more than 12 percent. Then, over the next week, it shot back up nearly 7 percentage points. A plummet of 31 percent followed from March 4 – March 23. At the time of writing, the market is back up 27 percent since the March 23 valley.
That’s a lot of up and down! And while some people are perfectly content riding out this storm, others are looking for more stable investments and strategies. If you count yourself in this latter group, here are a few principles to keep in mind:
- Dollar Cost Averaging Rules
The irony of investing is that most people feel confident putting money into the markets when there have been healthy gains over a period of many months, but squeamish when things have declined for an extended period. The problem with this approach is that people end up buying at the peak and don’t take advantage of purchasing when things are down.
This is why it’s important to implement the principle of dollar cost averaging (DCA). Under this approach, you invest periodically (usually monthly) regardless of market conditions. The theory is that, by purchasing at regular intervals, your purchase price averages out and the impact of volatility is minimized.
- Diversification is a Must
Portfolios that are extremely high in a select few equities and funds are much more susceptible to the sudden swings of the market. And with today’s conditions, there’s never been a better time to embrace diversification.
Diversification begins with spreading out investments with the same asset class – like equities. However, true diversification means actually delving into different asset classes – like real estate, precious metals, small businesses, etc. That’s where you really begin to shelter your portfolio and protect against volatile ups and downs.
- Shelter Short-Term Investments
If you need money over the short-term, cash is the safest place to keep it. But if you still want to earn a small amount, there are some other short-term investment vehicles you can utilize.
Term deposits – or CDs – are one such option. Rates are low at the moment, but they’re still a lot better than the measly tenth of a percentage point you’ll earn in most savings accounts.
Money market funds are also a good option, though they’re much more susceptible to losses. If you have at least a year before you need to touch the money, you might take the chance. If you’ll need the money within the next couple of months, cash is a better option.
- Keep the Long-Term in Perspective
It’s easy to get caught up in the ups and downs of short-term economic volatility. But investing is always about perspective. You have to balance risk and reward through a long-term lens. If you’re 35 or 40 years old, you shouldn’t lose too much sleep over your portfolio’s dips. You still have 20 to 30 years before retirement – ample time to recover any paper losses you’ve experienced.
Even if you’re closer to retirement age, you have to remember that markets almost always win over a 10-year period. Structure your portfolio so that it aligns with your age and risk profile, but don’t get overly conservative until you absolutely must have the money.
Which Investing Strategies Will You Use?
Investing is a highly personal concept. What works for one household isn’t always going to work for the next. Your investing strategy will depend on factors like income, assets, age, career outlook, goals, health issues, and risk tolerance.
With all that being said, the aforementioned principles are generally considered to be sound principles for anyone. Take the time to explore your own unique circumstances and factors, but you can feel safer when you use them during tumultuous times such as these.