7 Ways to Handle Investment Volatility

The coronavirus-infected stock market has left investors everywhere feeling anxious and uncertain. Here are seven things to consider:

1. Bulls are usually stronger than bears

Stock markets run in cycles: Bear markets (20%+ price drops over at least two months) become bull markets (20%+ gains), and the cycle repeats. The reasons range from general corporate health to geopolitical drama to, yes, recessions caused by pandemics. But historically, the upturns have been much stronger and lasted much longer than the downturns.

This chart shows the difference since 1946 — and why it’s important to stay calm and stay invested. In fact, a bear market could mean an opportunity to invest in high-quality companies at low prices.

2. Eggs do better in many baskets

Think you can forecast which types of investments will outperform others from year to year? Think again. The fact is, the list of winners and losers changes every single year. For example, in 2012 and 2014 global real estate¹ was the top performer among nine stock “asset classes” (up 28.7% and 15.9% respectively). But in 2008, when the U.S. housing market collapsed, real estate was the worst performer, down a stomach-churning 47.7%.

The moral: diversify. Invest in a wide range of assets based on your time horizon (how long until you’ll need your money) and risk tolerance (how well you handle the market’s ups and downs). It won’t guarantee profits or protect against losses. But it will help ensure that trouble with certain investments won’t affect your whole portfolio.

3. Emotional decisions are usually bad ones

Everyone wants to “buy low” and “sell high.” The problem is, most investors get caught up in the heat of the moment — and end up doing the opposite. That can create a vicious cycle of “herd investing” — following what others do, even if it means going over a cliff. This illustration shows what might go through your mind as the market rises and falls.

The lesson: When it comes to investing, disregard your stress, and stick to your strategy.

4. Think time in the market, not market timing

Successfully “timing” the stock market — buying at the bottom and selling at the top — is super difficult even for professional investors. The kind of short-term volatility we’ve seen lately makes it virtually impossible. What’s more, historically the stock market’s best gains have come on a relative handful of days. If you’re not invested on those days, you’ll miss golden opportunities that could take years to make up.

Example: If you’d invested $10,000 in the S&P 500 index² in Jan. 1999 and did nothing, after 20 years your stake would have been worth more than $32,000. But if you’d missed just the market’s 10 best days over that period, you’d have given up over $17,000 of that gain. The lesson: You have to be in it to win it. Stay invested for the long haul.

5. Dollar-cost averaging can help volatility work for you

Steady investing can pay off in choppy waters. When you invest a set amount of money at regular intervals, you automatically buy more shares when they’re cheap and fewer when they’re expensive. This strategy, known as dollar-cost averaging, lowers the average price you pay per share — and can smooth out the effects of market volatility on your money (if not on your sanity).

6. Rebalancing can help you stay on track

As boxer Mike Tyson said, everyone has a plan until they get punched in the face. You might start out with an asset allocation — how much of your money to devote to different types of investments — suited to your goal and risk tolerance. But over time, market performance could put your portfolio out of whack.

Example: Say your strategy calls for a mix of 65% equity (stock) investments and 35% fixed income (bonds). But since you last checked, your stock stake has grown to 75% (too risky) or, as in the recent market melee, fallen to 50% (not enough growth potential).

To get back on track, consider selling enough of the “overweighted” investment and buying enough of the “underweighted” investment to return to your 65/35 mix. (Some portfolios, like Prudential Managed Accounts, automatically rebalance for you.) One plus: In a bear market, rebalancing could mean buying high-quality stocks while they’re “on sale.”

7. A financial pro can put the headlines in perspective

It’s a lot to take in, particularly in stressful times like these. Before you go off the deep end or make emotional decisions you may regret, take a deep breath and contact your financial professional. They can help you create a plan to weather market conditions, stay on track toward your goals, and put your mind at ease.

Footnotes

Ira Hellman is a senior writer at Prudential.

¹Global Real Estate — Financial Times Stock Exchange European Public Real Estate Association/National Association of Real Estate Investment Trusts (FTSE EPRA/NAREIT) Developed Real Estate Index. Represents the performance of listed real estate companies and REITs worldwide.

²Indexes are unmanaged. You cannot invest directly in an index.

This is being provided for informational and educational purposes and does not consider your personal investment objectives or financial situation. Since individual circumstances vary, contact a financial professional to address your personal needs. Investments involve risk, including the possible loss of capital.

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