During cycles of calm or when markets become choppy, it pays to have an investment plan and to stick to it.

Key takeaways

• Keep perspective:  Political uncertainty is a way of life and it’s only going to get worse. Minor corrections and downturns happen frequently, but market setbacks have been followed by recoveries.
• Stay disciplined:  Don’t try to time the markets—it can cost you.
• Plan for a variety of markets:  AKA Diversify!!! – An investing approach built with your goals, dreams and circumstances will help you cope with short-term volatility.
• Consider help:  You may want to look at a professionally managed solution.

Investment risk, and therefore volatility, can come from many different directions.  They consist of:

Market risk – Affects all investments (ie: inflation and interest rates).

Business risk – Affects a particular company or particular segment (ie: tariffs on imports).

Reinvestment rate risk – Affects the investor when they reinvest a matured security at interest rates less favorable.

Credit risk – Affects the investor if the company invested in is in default of financial covenants.

Liquidity risk – Affects the investor if they cannot quickly convert an asset into cash without a price concession.

Country risk – Country specific political and financial turmoil (ie: exchange rate risk).

Tax risk – The extent an investment is exposed to changes in tax laws.

Investment manager risk – When an asset manager fails to select good investments for the fund or client, or if a successful manager departs from the firm.

Policy uncertainty between governments, earnings reports, geopolitical unrest and market swings can rattle even the most seasoned investors’ nerves.  Volatility is part and parcel of investing.  We must accept change and the uncertain times and use them as a motivator to help ensure our investment strategy aligns with our long-term goals and dreams as well as our appetite for risk.

The seemingly wide swings in the market from day to day or month to month may cause us to question our investment strategy and worry about our retirement nest egg.  A natural reaction to that fear might be to reduce or eliminate any exposure to stocks, thinking it will protect our remaining investments and allow us to sleep better at night. Instead, in the long term, it may cause more sleepless nights, as we have locked in all losses permanently.

Instead of being worried by volatility, be prepared.  A well-thought through investment plan that meets our goals can help us be prepared for the normal ups and downs in the market, and allows us to take advantage of opportunities as they arise.

Market volatility should be a reminder for all of us to review our investments regularly and make sure we consider a well-diversified investment strategy with exposure to different areas in various markets (U.S. small and large caps, growth, income, international and bonds) to help match our portfolios to our goals and our ability to tolerate risk.

Here are a few ways to do this:

1. Stay Focused—it won’t last forever

Market downturns are upsetting, but history shows that the U.S. stock market has been able to recover from declines and can still provide investors with positive long-term returns.  In fact, over the past 35 years, the market has experienced an average drop of 14% from high to low during each calendar year, but still had a positive annual return more than 80% of the time. As an example, in 2015 and 2016, U.S. stocks experienced sharp drops in August 2015, when China devalued its currency;  in January 2016, as oil prices dropped;  in June of 2016, after the “Brexit” vote;  and in the run–up to the 2016 U.S. presidential election.  Still, during that 2-year period, the market was up close to 8% cumulatively.

2. Know your investments

To be nervous when the market goes down is normal, however, it may also indicate that we are not in the right investments.  Our time horizon to retirement, goals and dreams, and our tolerance for taking risks are critical factors to help ensure we have an investment strategy that will work and be in alignment.  Even if our time horizon is long enough to warrant an aggressive portfolio, we have to be comfortable with the short-term ups and downs that we will encounter.  We also need to be wary of being too conservative, especially if we have a long time horizon.  Strategies that are more conservative may not provide the growth potential needed to achieve our goals.  We should set realistic expectations so that it will be easier to stick with long-term investment strategies.

3. Don’t try to time the market

Attempting to move in and out of the market can be costly.  Research studies from independent research firm Morningstar show that the decisions we make about when to buy and sell mutual funds cause us to perform worse than if we would have had simply bought and held the same funds.  If we could avoid the bad days and invest during the good ones, it would be great—the problem is, it is impossible to consistently predict those good and bad days. And if we miss even a few of the best days, it can have a damaging effect on our portfolio.

4. The Tortoise v. the Hare

If we invest regularly, (over months, years, and decades) short-term downturns will not have much of an impact on our ultimate performance.  Instead of trying to judge when to buy and sell based on market conditions, we should have a disciplined approach of making investments on a regular basis over a longer time horizon.  The terminology here is called dollar cost averaging.  If we keep investing through downturns, it won’t guarantee gains or that we will never experience a loss, but when prices do fall, we may actually benefit in the long run. When the market drops, the prices of investments fall and our regular contributions allow us to buy a larger number of shares.  In the past, what seemed like the worst time to get into the market, turned out to be the best time. The best 5-year return in the U.S. stock market began in May 1932—in the midst of the Great Depression.

5. Stay positive and take advantage of opportunities

There may be a few actions we can take while the markets are down to help set us up for a better future.  For example, if we have investments we are looking to sell, a downturn may provide the opportunity for “tax-loss harvesting,” (when we sell an investment and realize a loss that could help with tax planning.  Another example is initiating a ROTH conversion, (moving money from a traditional IRA or 401(k) to a ROTH account).  We may pay additional taxes today but the conversion to a ROTH removes any further taxes on earnings; and if prices are lower, a conversion in a downturn may result in a lower tax bill for the same number of shares.  Lastly, if a downturn in the markets has changed our asset mix to a point where it significantly differs from our desired investment policy, we may want to re-balance our assets to get back to our plan. This process could help us take advantage of lower prices as we re-balance.

6. Stick to the plan

Instead of being consumed with a turbulent market, we should focus on developing and maintaining a sound investment plan that supports our goals and dreams.  A good plan will help us ride out the ups and downs of the market and allow us to achieve success.