Investing in the stock market can be difficult when volatility is high.
Few people can stomach seeing their portfolio rise dramatically and then fall fast the next day.
Unfortunately, the current economy is not in a good place to support market stability. With COVID-19, the Russo-Ukrainian War, and skyrocketing inflation, volatility is practically the norm. Uncertainty is very high, and it can be tough to determine how to invest and allocate money in times like these.
Still, it's important to remember that certain principles on how to deal with a volatile stock market hold, regardless of whether the volatility is high or not. Those who want to preserve their wealth during volatile times will do well to remember such principles.
How to Deal with a Volatile Stock Market
Recently, the federal reserve announced that they would be raising interest rates and the stock market underwent a steep decline. Shortly after, the stock market experienced a quick recovery as investors observed a potential peak in inflation. This kind of volatility has not been present in the market for nearly a decade. Those who benefitted from the recent fluctuations are people who knew how to deal with a volatile stock market.
Remind Yourself of Your Time Horizon
Many investors panic and sell off many of their investments when the markets dive. Most investors who do this don't sell because they need the money; they sell because they are worried the stock market will drop even more than it already has.
Unfortunately, many investors lose money on the sale of their holdings because they sell at a loss. So one important thing to remind yourself about when the markets are experiencing volatility is your time horizon.
Chances are, you're investing for the long run for some retirement or wealth goal. If that's the case, it doesn't matter that the stock market is experiencing volatility. So if you're not planning on liquidating your position anytime soon, you don't need to worry about short-term market fluctuations.
Follow an 80/20 Portfolio Structure
A portfolio of 80/20 stocks and bond split has historically provided more stability than an all-equity portfolio composition.
If you're concerned about volatility and want to introduce more stability into your portfolio, consider diversifying away from stocks and into bonds.
One significant benefit of the stocks and bonds portfolio is it's straightforward to rebalance. For example, if stocks take a big hit, their percentage in your portfolio will decrease, and you can add to your bond allocation. Likewise, if stocks rise very quickly, you can take some capital gains and invest more into bonds.
Adopting an 80/20 stocks and bonds structure can help you limit fluctuations in your portfolio and better deal with volatility.
Set Up Automatic Investing
One popular way to deal with volatility is to dollar cost average over time. Instead of investing a large lump sum all at once, consistently invest a set amount of money every month.
You can employ dollar cost averaging very effectively by setting up automatic investing. To do so, call your brokerage and ask them to automatically deposit a set amount of money from your bank account every month and then invest it into an ETF, index fund, or stock of choice.
Automatic investing can help you deal with volatility by reassuring you that you'll still be buying regardless of whether the market goes up or down. When the market dives lower, your money will buy more shares, and you'll also somewhat insulate your investments from the overall volatility.
Talk to a Financial Planner
If you're concerned about your investment portfolio and resources during a downturn, something you can do is talk to a financial planner.
Volatility often causes people to act irrationally regarding their finances and make poor choices. Talking with a financial professional can help you clarify your goals, determine your risk profile, and help you make sure that the decisions you're driving make sense.
A financial planner is also someone who can act as a buffer of common sense for you when the markets start getting volatile. They can remind you that even though lots of things are happening worldwide, your financial goals likely haven't changed.
One of the best ways to find a good financial planner is to network until you find a financial planner you can trust. Invite some potential financial planners out to coffee chats and interview them to see if their goals align with yours. Eventually, you'll be able to find a financial planner whose interests will work with yours.
When the stock market takes huge swings, you can take advantage of it by buying the dips. When certain stocks or indexes drop below a specific price point, commit to purchasing more of them (as you'll be able to scoop them up at a lower cost).
If you're looking for ways to cut costs so that you can invest more money, here are some things to try:
- Stop eating out and start bulk meal prepping (food is often the most significant expense in a family budget).
- Reduce your gas bill by biking and walking more places. You could even consider working from home more for the time being to save on fuel costs.
- Cancel subscriptions you're not using. These subscriptions can include any miscellaneous streaming, video, or magazine subscriptions that could be sucking away your financial resources.
Saving more money during uncertainty is an excellent way to prevent yourself from having to dip into your investments for support and can also give you more money to add to your portfolio. One of the best ways to deal with a volatile stock market is to take advantage of the movements in asset prices.
How to Deal with a Volatile Stock Market
With more unpredictable events happening daily, the economy and the stock market will likely experience more volatility than in the past.
As investors, it's essential to remain calm and employ strategies to help you deal with the volatility.
None of the methods are very complex or too hard to do. So all it takes is the courage to use them to your advantage.
Jeff is a current Harvard student and author of the blog Financial Pupil who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.