When a stretch of bad weather arrives, do you barricade yourself in your home, waiting for a perfectly sunny, 70-degree day before you’ll emerge?
Of course not—think of what you might miss.
Similarly, while it seems easy to get out there and invest when there is a bull market, in a downturn people may want to pull back. That’s not always the best strategy.
Instead, you may continue to invest and equip yourself with a good strategy, just as you would cope with bad weather using a raincoat and umbrella. These three simple steps could help your portfolio weather a potential storm.
Generally speaking, your time horizon, goals, and tolerance for risk determine whether your strategy should be aggressive, conservative, or somewhere in between. While goals and time horizon are fairly straightforward, risk is often difficult to ascertain. If recent volatility is disrupting your sleep, consider making a few adjustments.
History shows that market gains can occur in a few strong but unpredictable trading days. Sticking with your retirement savings plan ensures that you invest a fixed amount at regular intervals. This “dollar cost averaging”1 may result in better average share prices than trying to time your purchases.
Also find out how your assets are spread across stocks, bonds, and short-term investments. The best-performing asset classes vary from year to year, and combining investments that respond differently to market conditions helps control risk.
Volatility can inspire fear, and even greed, but don’t let either emotion take over. Base your decisions on solid information and careful analysis, not on emotional reactions to newspaper headlines. Focusing on your long-term goals can help calm jitters caused by short-term market fluctuations.
Remember, market fluctuations are nothing to be afraid of. In fact they’re as normal as changes in the weather—and a few precautions when the sun sneaks behind the clouds can help you prepare to enjoy a sunny retirement.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
1 Dollar-cost averaging does not ensure a profit or guarantee against loss in declining markets. For the strategy to be effective, you must continue to purchase shares both in market ups and downs.
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