Most investors know that the market experiences upswings and downturns with risks at various times. Yet, it is best not to follow your emotions and sell when you see a problem on the horizon. Making incorrect choices might reverse all of your progress.
Volatility is a normal part of long-term investing. It refers to sudden price increases as well as decreases. Any asset whose market price fluctuates over time has some degree of volatility. The larger and more frequent these movements are, the higher the volatility.
It is normal to feel uneasy about your investments, but market volatility is to be expected. Be prepared for annual average returns to fluctuate by roughly 15%. And every five years, this number would reach approximately 30%.
How to Start Investing in a Volatile Market?
Volatility results from investors reacting to short-term changes in certain things like government policy and economic data. Even though it has some challenges, you can still start investing in a volatile market.
Clarify Your Investment Strategy
You can only go to a battle with a strategy. As with investing in a volatile market, having a clear investment strategy will help you deal with market volatility. Build your approach by understanding your goals, time frame, and risk tolerance.
Investing in a volatile market means facing investment risks every day. This type of risk refers to uncertainty about losing all or a portion of an investment. To put it another way, you can never be sure if your investment will yield the profits you want or if you will suffer adversity.
Match Investments to Your Comfort Level
Do not try to time the market, as it will give you something different every day. Even if you have a long enough time horizon to justify an ambitious growth portfolio, you should still be prepared for the short-term ups and downs you might experience.
Wells Fargo Investment Institute found that investors who missed a few of the best days could significantly increase their average annual return by merely holding onto their equity investments during market sell-offs. Over more extended periods, however, that return would be substantially reduced.
If you find it too stressful to watch your plan’s balance fluctuate, choose a portfolio that feels right to you and set reasonable objectives.
Regularly Invest in Small Amounts
Try investing in small amounts first to lower the average cost of your investments and reduce the risk of investing in a volatile market. Do not follow your fear and splash all your money down the drain since a regular investing plan is adaptable. You can use dollar cost averaging since you continually invest the same amount, no matter how the markets perform.
Charles Schwab found that investors who tried to time the market made far less money than those who invested regularly using dollar cost averaging. This method reduces the chance of investing a large sum at the wrong time.
By diversifying your investments, you can reduce the likelihood of losses, risks, and volatility when investing in a volatile market. Avoid relying too much of your portfolio on a single investment. The value of your investments would decrease by 15%, for instance, if you only hold one stock and it drops by 15%.
According to the Financial Industry Regulatory Authority (FINRA), diversification is distinct for each person. Therefore, you should think about it after speaking with a professional or using your judgement. Your portfolio should reap benefits if you include even one additional investment that performs well—or at least doesn’t decline as much.
Remember to remain focused on the long-term effects while making investment decisions. Markets can change quickly, and it is essential to be comfortable with your plan and your emotions in the face of uncertainty. As you’ll be able to anticipate and tolerate the frequency, magnitude, and length of these drawdowns, you will have more patience when investing in a volatile market.