In recent months, stocks have fallen sharply from their record highs, with one-day drops that can rightfully be called “dizzying.” As an investor, what are you to make of this volatility?
For one thing, you’ll find it useful to know the probable causes of the market gyrations. Most experts cite global fears about China’s economic slowdown, falling oil prices and anticipation of a move by the Federal Reserve to raise interest rates as the key factors behind the stock market’s decline.
On the other hand, the U.S. economy is still doing fairly well. Employers are adding jobs at a pretty good clip, wages are rising, home prices are up and overall economic growth has been reasonably solid. In other words, we are in a vastly better place than in the period before the Great Recession of 2008 and early 2009, when the financial markets bottomed out.
Nonetheless, it’s only natural that you might feel some trepidation over what’s been happening in the financial markets over the past few weeks. So, what should you do? Here are a few suggestions:
Expect more of the same. Be prepared for more volatility, potentially including big drops one day followed by big gains the next. Until the factors considered responsible for the current volatility – that is, China’s slowing economy, low oil prices and the Federal Reserve’s decision on rates – have been fully absorbed into the market’s pricing mechanisms, big price swings, one way or another, are to be expected.
Don’t panic. The headlines may look grim, but today’s newspapers are tomorrow’s recycling pile. Volatility is nothing new, and the financial markets are more resilient than you may think.
Look for opportunities. By definition, a downturn occurs when investors sell massive amounts of stocks, but it actually may be a good time to buy them, while their price is down. Look at the most successful businesses and their products and services. If you can envision these companies still being around and thriving in ten years, why wouldn’t you want to buy their stocks at potentially lower prices?
Diversify. During the downturn, just about everyone’s portfolio was affected. But if yours took a particularly large hit, it might be because your holdings are over-concentrated in stocks, especially the types of stocks that fared the worst. You may need to further diversify your portfolio through a mixture of domestic and international stocks, bonds, government securities, real estate, certificates of deposit (CDs) and other vehicles. Diversification, by itself, can’t guarantee a profit or prevent against all losses, but it can help blunt the harshest effects of volatility.
Review your investment strategy. Unless your goals have changed, there’s no reason to revise your long-term investment strategy, even in the face of wild fluctuations in the financial markets. Still, it’s always a good idea to review your strategy at least once a year, possibly in consultation with a financial professional. You may need to make smaller-scale adjustments in response to changes in the economy, interest rates, and so on, but don’t abandon your core principles, such as maintaining a portfolio that reflects your goals, risk tolerance and time horizon.
Investing will never be either risk-free or predictable. But by taking the steps described above, you can relieve some of the stress associated with volatility and help yourself stay on track toward your financial objectives.
Past performance does not guarantee future results. Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.
This article was written by Edward Jones for use by your local Edward Jones Financial Adviser. Douglas J. Drost CFP Financial Adviser for Edward Jones, 2262 Reno Highway.