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Stress, confusion, fear–stock market trading can quickly become an emotional roller coaster.
You’ve poured in countless hours researching and studying the stock market and come up with a plan that feels like a surefire success, only to watch as your stocks fall sharply on tumultuous days.
Fortunately, there are several tactics you can employ to stay ahead of shifts in the markets and make better decisions even under intense circumstances.
In this article, we’ll review 13 proven strategies you can use when navigating the wild stock market so that no matter what twists turn your portfolio takes, you can keep calm and wear your shirt proudly!
What Is Volatility?
Stock market volatility is the measure of the overall up and down movement of the stock market.
There are times when there is little volatility and the stock market moves sideways more than up or down.
Other times, the market can swing wildly back and forth. This is what happened during the financial crisis in 2008.
On September 29, 2008, the S&P 500 Index dropped 8.79%, which at the time was the 7th largest daily drop on record.
Just 10 days later, it dropped another 7.62%. Then it rose 11.58% just 4 days later. This is the 5th largest one day increase in history.
Two days later, another drop of 9.04% followed almost two weeks later by a huge gain, 10.79%.
This is the type of volatility that gets many investors into trouble. They try to time the market, getting in or out at the exact right time.
But aside from getting lucky once in a while, this investment strategy usually ends badly.
Now that you know what volatility is, here are the ways for how you can handle these times of volatility so you can survive it, and maybe even take advantage of it.
#1. Have A Financial Plan
Before you invest, regardless of volatility or not, you need to have an investment plan.
You need to know why you are investing, what you are investing in, and your time horizon, or how long you plan to invest for.
These are your investment objectives. By knowing this information, you can refer back to it when a crazy market sets in.
In the moment, you might be fearful, but when you look back at to why you are investing and when you need the money, some of this fear will subside.
If you look at anyone that is successful at anything in life, chances are they had some sort of plan.
They rarely stumble into major success.
The same is true with reaching your investment goals and building wealth. So if you don’t have an investment plan, and sadly the average investor doesn’t, you need to take the time and create one.
It is a simple way to decrease the risk of you acting irrational during these times of extreme volatility.
#2. Look Long Term
Part of knowing that market conditions change is to focus on long term investing.
Don’t focus on what the market is doing right now. Remember that over time, the market rises.
In fact, the stock market usually has a positive return 73% of the time. So out of 100 years, 73 years the market will have a gain and 26 times it will have a loss.
The more you can focus on the long term and not the day to day movement of the stock market, the better off you will be.
#3. Dollar Cost Average
Another option is to dollar cost average in your investment portfolio. Set up a monthly investment into your investment accounts.
When you do this, you buy more shares regardless of the price.
If the market drops a significant amount, you will end up buying a lot of shares for a lower price.
Then when the market comes back, you will have a larger gain, making your investments worth even more money.
#4. Avoid The Hype
The media loves to hype up news stories.
They know the more engaged a reader or viewer is, the more likely they will stay tuned in. And the greater the number of tuned in users, the more they can charge for advertising on their platforms.
In other words, the media has an incentive to sensationalize stories.
This is why when the stock market drops, the news will show images of people with their heads down, feeling regret, sorrow and despair.
They usually will also include some somber music and have parts of the screen red. They know the fear of you losing money is money in their pocket in terms of viewership.
Now that you know this, you can remember it the next time the market drops and this story runs. Or better yet, just turn the channel.
What your favorite sitcom. Or simply turn off the television and go for a walk, read a book, or hang out with a friend.
The more you can avoid the hype, the more in control of your emotions you will be.
#5. Learn From Your Mistakes
It is inevitable that you will make investing mistakes.
One day your emotions will get the best of you. It happens to everyone, so there is nothing to be ashamed of.
But instead of forgetting about your failed emotional decisions, learn from them.
What happened that caused you to react the way you did? What would you do different next time?
By knowing what made you react in the past will help you to find a solution for dealing with it moving forward.
This goes back to having a plan.
By having a plan in place for how you will react if the cause of your mistake comes up again, you can handle in a more rational way, potentially avoiding investment losses.
#6. Know Your Risk Profile
In addition to having and investment plan, you need to know your risk tolerance.
This will help you to determine what asset classes you should invest in.
For example, if you can handle moderate risk in the stock market, you might invest in a portfolio that has 60% in stocks and 40% in bonds.
This balanced portfolio will help you weather stock moves because stocks and bonds tend to move in opposite directions.
Going back to the example earlier with the S&P 500 Index, on 9/29/2008 when the index dropped 8.79%, the iShares Core U.S. Aggregate Bond Index (AGG) dropped 0.5%.
When the S&P 500 dropped 7.62%, the bond index was up 0.2%. By knowing your risk tolerance and investing accordingly, you only take on the level of risk you are comfortable with.
#7. Diversify Your Investments
Having a diversified portfolio is an excellent way to handle volatile markets.
When your asset mix is fully diversified, you don’t experience the extreme losses you otherwise would if you only invested in one sector of the market.
Of course, there is the risk of over-diversifying, which is when you think that having more mutual funds or exchange traded funds is better.
The reality is you only need a couple of mutual funds to be fully diversified.
#8. Don’t Check Your Balances
Related to the point above, many investors will log into their investment accounts to see how much money they lost during periods of volatility.
This is an excellent trigger to get you to act irrationally.
Work on changing this habit. When the market falls, do what I suggested above and forget about the stock market.
Only check your portfolio balances on a set day every month or only on days the market is higher.
Either of these is sure to lower the chance of worry over your investments.
#9. Reflect On The Past
One bad thing about humans is we have poor long term memories.
After a period of time, we don’t remember things and if we do, we compartmentalize them and they don’t seem so bad.
By reflecting on the past, ideally by using a journal, you can look back when there was a major selloff in the market.
You can see how you survived it and this will give you confidence you will survive it again. It can help here too if you write down your portfolio balance at the time.
This can serve as a reminder that the market does rise over time. While it looked bad that you lost 30% of your investment portfolio, you can see that you made it all back, plus more in the years since.
#10. Keep Cash On Hand
Finally, you want to always have cash on hand. I like to keep between 5% and 10% in cash.
When the stock market drops, I put this money to work by buying shares. Then as the market rides higher, I rebuild my cash balance so when the next downturn happens, I can again take advantage of it.
By investing money when the market is dropping I am training my brain to see that stocks are on sale or at a discount and now is the time to buy.
The better you get at seeing market drops this way, the easier it becomes to stay invested.
#11. Know That Nothing Is Permanent
A lot of times, we get caught up in the moment.
If the market is moving in one direction, we think it will never change course. But it always does.
Remembering that no market conditions are permanent is important.
You have to keep in mind that the market is a cycle, it goes up and then comes down, usually based on economic cycles.
These cycles can be short lived or drawn out over time. For reference sake, the average bull market lasts close to 3 years and the average bear market lasts 10 months.
Just remember though that this is only the average and some will be longer and others shorter.
Finally, this doesn’t mean the market will only move higher during a bull market and only lower during a bear market.
There is a general trend over time, but the daily movements vary every day.
#12. Rebalance Your Portfolio
These final 3 tips will help you to take advantage of wild swings in the market.
The first is to rebalance your portfolio.
As the market moves, your original asset allocation is going to get out of alignment.
This could mean you are now taking on more risk than you are comfortable with, or it could mean you are investing too conservatively.
For example, if the market goes on a run up, your stocks will increase in value, making the equity portion of your portfolio greater than planned. If the market drops for a while, you will have a greater percentage of fixed income investments, possibly stunting future growth.
Either situation will make it harder for you to reach your financial goals.
So take the time to rebalance your investments in a way that makes the most sense for you. This will ensure you are always investing with the target asset allocation and level of risk you are most comfortable with.
#13. Work With A Professional
Another option for investing in a volatile stock market is to work with an investment professional. This could be a financial advisor, financial planner, or even a robo advisor.
By working with someone, you can talk to them about your fears and concerns, and they can reassure you to stay the course.
When I worked at a financial planning firm, I can’t tell you how many times this happened.
During volatile times, we were more therapist than investment advisor. We simply reassured our clients that everything was going to be OK and to just ride it out.
The ones that listened to us experienced excellent returns in the following years.
While working with a financial professional does cost money, you can’t look at just this side of the equation.
You have to understand the value they bring. And if that value is keeping you invested and seeing your portfolio double in value, then that fee is well worth the price.
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.