Volatility: When the Markets Take a Tumble

What to do during unstable and volatile financial times

As an investor, you need to be aware of the stock market and have a keen understanding of market volatility – because chances are you’re going to need every bit to keep you from caving in, when everything comes crashing down.

It is difficult to be optimistic and to visualize things getting better, when all you see is a sea of red as you stare at the ticker. Terms and phrases such as “recession”, “crash”, “falling stocks”, or “bear market” tend to make many investors nervous. Those who go into a state of panic soon find themselves in a selling frenzy, unable to see past the chaos. This type of behavior and lack of foresight is something that financial advisors and experts advise their clients not to do, simply because: a) there is nothing you can do to stop the bleeding, b) historical records show this kind of market action is expected every few years, and c) it is actually a good time to do the opposite, which means you can buy more for less.

First and foremost, diversify:

There is neither a way to time the market, nor is there a sure-fire line of attack to beat it. On the other hand, there are plenty of strategies to lessen the impact that market volatility can have on your portfolio, but not to avoid it completely. You may hear from financial experts that diversification is key to ensuring that your investments and returns experience minimal hits during wild markets. To explain why this is important, below is an illustration from Franklin Templeton Investments:


Stocking up and buying more:

Those who analyze and watch the markets closely say it’s about time the markets crashed – why is that? When we look at historical data, we’ll see that recessions occur at least every six to 18 months (“Are We Due for a Recession in 2015?” – Forbes). With that being said, the cost of stocks per unit go down, so it makes sense to buy more in order to reap the benefits when everything bounces back up:

Mackenzie ChartThis kind of proactive optimism shifts the economy back into high gear, and eventually, we find ourselves climbing back into the black. Simply put, if we see past the dark days of a recession or bear market, we can benefit and see better returns in the future. Conversely, if you’re not keen on taking the plunge and buying at this opportune time, another option is to hold, be patient, and ride it out.

Either way, rest assured that you are winning when you’re not throwing in the towel and giving everything up in a state of panic.

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