6 ways to keep a level head during stock market volatility

By: Kimberly Lankford

The recent stock market volatility may have you worried about your investments. Even if you know that you should invest your long-term savings primarily in stock funds, it can be hard to stomach big losses over the short run. But the worst thing you can do is to panic and sell after a day of big losses — then miss the opportunity for gains when the stocks rebound. The following steps can help you keep a level head during times of stock market volatility.

Match your investments with your timeframe. If you have decades before you plan to retire, don’t focus on short-term movements in the stock market. Instead, consider your timeframe. Stocks are more volatile than other investments over the short term, but historically they have performed better than lower-risk investments (such as bonds and cash) over the long term. If you move money you don’t need for a long time into fixed-income investments that have lower market risk, you could end up facing a different risk — inflation — if the returns on that money don’t keep up with the rising costs of your expenses.

But as you get closer to retirement, it’s important to start to shift some of your money out of the market and into less-risky investments, so you don’t have to worry about selling losing investments during a downturn to pay your bills. However, you may still have 20 or 30 years in retirement, so it’s a good idea to keep some of your money invested for the long term, even when you’re in your 60s.

If you invest in a target-date fund, financial professionals will make these moves for you automatically — investing your portfolio primarily in stock funds when you have decades before retirement, and then gradually shifting some money to more conservative investments as your retirement date gets closer.

Diversify your portfolio. It’s impossible to predict which type of investment is going to perform best next, so it’s a good idea to spread your money over several types of investments. For example, if you want to invest your long-term savings primarily in stock funds, you can spread out your money among funds that invest in different types of companies, including some that focus on large companies, some on small companies, and some on international firms. You can also diversify the investing approach — with some money in funds that focus on growth stocks, and some in value funds that look for companies that are poised for a turnaround.

If you have a target-date fund, the investment professionals create a diversified portfolio based on your timeframe.

Rebalance your portfolio. Even if you carefully chose your investments based on your timeframe and risk tolerance, it’s important to review those investments on a regular basis to make sure that your investment mix still matches your target allocation — especially after a period of volatility. Otherwise, you could end up with a much larger portion of your portfolio in stock funds than you originally selected and your portfolio may be more risky than you intended — or vice versa if bond funds have performed better than stocks.

It’s a good idea to check your portfolio at least once a year to make sure your investments still match your target allocation. You can sell some of the funds that have performed better and buy more of the lesser-performing funds, or you can invest new money in those funds to bring your allocation back up. Some 401(k) plans have an automatic rebalancing feature, and investing professionals will regularly rebalance the portfolio if you have a target-date fund.

Take advantage of dollar-cost averaging. A good strategy for keeping a level head during a volatile market is to make the most of dollar-cost averaging — which means investing a fixed amount into your portfolio on a regular basis, whether the investments are up or down. In fact, if they’re down, your money will buy more shares that can increase in value if the market turns around. An easy way to do this is through your 401(k) or other retirement-savings plan through work — you have a fixed amount of money invested automatically from each paycheck no matter how the investments are performing. It takes away the temptation to try to time the market. You can also sign up for automatic investments from your bank account into an IRA or other account every month.

Keep a cushion of safe money. Even if you know you shouldn’t worry about stock market volatility for your long-term investments, it’s important to have some money available for your short-term needs — so you don’t have to sell stocks for a loss to pay your bills. Keep an emergency fund that covers at least three to six months of expenses no matter how old you are, and make sure the money is in a safe and accessible account, such as a money-market account. Be sure to replenish the emergency fund after you use the money.

As you approach retirement, it’s important to build up a larger cash cushion — with enough to cover your expenses for the next few years so you know you can pay your bills no matter what happens in the stock market. But you usually can’t afford to move all of your money into a safe account at retirement because you may still be retired for 20 or 30 years and money in cash may not keep up with inflation over that time period. It’s a good idea to keep some of your money invested for the long-term, even when you retire.

To figure out how much of a cushion to have as you approach retirement, add up your expenses and subtract any guaranteed sources of retirement income (such as from Social Security and a pension, if you have one) then keep enough money to cover the gap for at least the next two or three years in safe money, such as a money-market fund or a stable value fund, if available in your 401(k). There are also other ways to fill in that savings gap, such as with an immediate annuity or deferred-income annuity, which pay out a fixed amount every year no matter what happens in the stock market.

Stick with your plan. When your investments match your timeframe and you have a cash cushion to cover short-term expenses, then you can worry less about the daily movements of the stock market. Review your plan regularly to make sure you’re still on track, and take advantage of professional help offered through your 401(k) or other retirement-savings plans (such as target-date funds, automatic rebalancing, and any portfolio review services). If you’d like extra help, it may be a good time to work with a financial planner who can analyze your cash flow and review (or manage) your investments and make sure you’re on track to reach your goals, especially as you’re getting closer to retirement.


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