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Jeff Fleming
What is the best investment strategy for a volatile market?
Question:
This year's market slide has left my portfolio looking mighty ragged. How can I protect myself from more damage?
Answer:
This year's stock market volatility has taken many investors by surprise. A decade-long boom gave us the idea that investing was fun, and making money was easy. Not so this year. In fact, I recently heard someone make an analogy of the stock market to an elevator with only two buttons -- crash and soar. No wonder that people want off. Now the question becomes what strategies can we implement in light of this volatility?
Specific volatile market strategies may differ depending upon your investment method. For example, if you are a market timer, then perhaps you should be sitting on the sidelines until such time as you think the downward trend will stop. Investors who pick specific stocks or mutual funds need to re-evaluate their portfolio's holdings, but may also have a field day choosing from securities the prices of which have dropped dramatically, and that now present buying opportunities. The following volatile market strategies are applicable to all investors, regardless of methodology, but they are especially important and appropriate for those who invest based on asset allocation.
1. Tame Your Emotions. My first recommendation, and perhaps the hardest to achieve, is for you to remove your emotions from your analysis. Make investment decisions based on your plan and methodology, not from fear, which can be paralyzing. A rational approach will keep you on course whether you actively trade stocks or hold mutual funds in an asset allocation strategy. Believe it or not, measuring your success based on a long-term view will be extremely helpful as well. Don't panic in the short-term, just have patience.
2. Review Your Goals and Re-Commit to Your Plan. If we assume that you initially created your investment mix based on specific personal investment goals, time horizon, and risk tolerance level--then re-evaluate each of these. Have they changed, and if so, how much? A volatile market tends to reduce confidence, so it is entirely possible that you may now realize that your risk tolerance level is not nearly as high as you thought. Whatever your plan was when you initially created it, stick with it. I know this takes a lot of discipline, but it creates the rational approach I refer to above.
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