Investing wisely in the stock market can help grow your money for years to come. Below are some tips to navigate.
Occasional stock market volatility is a near certainty. While it can be hard to predict when it occurs or how much it causes the market to see-saw, a phase of instability every now and then is only to be expected. The year 2017, for instance, saw the Dow Jones Industrial Average fluctuate by one percent a few times over the year; the following year, however, saw two of the steepest drops in history occur over a period of six months. Learning how to react when the stock market rapidly loses value is an important part of being a successful investor. Here are some tips to help.
Don't put your emotions in charge of your actions
The first rule of stock market investing is to not act on panic when things begin to seem volatile. It is in the nature of stock markets to self-correct once in a while. It's only a healthy occurrence, because it offers investors an opportunity to introduce new funds into the market. You don't want to react emotionally when volatility sets in. When you make poor choices in a volatile market, they can be hard to recover from. When the market is unpredictable, the rule you follow should be to do as little as possible. Less is more in volatile markets.
Stay secure with an emergency fund
It can help keep panic at bay to have a part of your funds in liquid investments that aren't subject to market fluctuations. When the market declines, the fact that you have investments that are safe from those effects can calm you down, and help you think more clearly. In general, if you're young, emergency funds worth six months of living expenses make sense. If you're retired, your emergency funds need to be substantial enough to see you through two years.
Understand what your tolerance for risk is
Your tolerance for risk can change over time. When you experience stock market volatility a couple of times, you begin to get a better idea of the level of tolerance that you have for risk. If you're very uncomfortable with your current portfolio distribution, you might begin to invest more in bond holdings than in stocks. Bond holdings can be your anchor in turbulent times. It's important to not put too much of your money into bonds, however. While bonds tend to be stable, they tend to offer low returns, which can mean that you don't achieve your long-term goals.
Gain an idea of what your holdings are worth
Many investors make the mistake of not doing their homework. They don't truly understand the companies whose stocks they hold. When you have no understanding of the fundamentals of the stocks in your portfolio, you are far more likely to be swayed by the headlines and opinions in the news. Make sure that you grasp what it is about every company in your portfolio, that makes it a good bet. Your understanding should be thorough enough to allow you to explain it to a child. When you understand things this well, you'll find it's easier to ward off panic.
Don't lock your losses in
Many people react to dropping markets by selling. They simply want to cut their losses as early as possible. It's important to understand, however, that market dips and selloffs are often followed by market rallies. When you sell on the decline, you only make your losses permanent. It's a better idea to buy on a decline. You can put in research to identify stocks of companies that have strong fundamentals, and that are undervalued, and pick a market drop to stock up on them.
The wider the range of investments that you put your money into, the less your exposure to any one investment when the market drops. Diversifying involves putting your money in a varied range of investments from emerging market debt, to real estate, and commodities. These investments tend to be unaffected by stock market fluctuations and can give you considerable protection in an unpredictable market.
It can take time and experience to internalize the right way to react when you deal with stock market volatility. Knowledge, research, and diversification, however, can help you make sensible calls.
To learn more about how you can invest wisely in the stock market, call the office of Matt Logan, at 336-540-9700.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.