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Investing 101: Understanding market volatility

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Market volatility simply refers to a change in asset prices, and it's nothing to fear as an investor — as long as you know how to handle it.

Handling volatility in your portfolio: 4 tips for success

There are many strategies you can use to help ensure your portfolio can handle market volatility when things swing up or down — or back and forth! Here are just a few:

1. Diversify your portfolio

In simple terms, diversification is a strategy that prevents you from keeping all your eggs in one basket — or all your wealth in one type of asset.2 Keeping a mix of assets means that your wealth isn't tied to the performance of any one thing. When volatility happens, you may see part of your portfolio decline in value, but you don't risk losing it all.

2. Think of volatility as an opportunity

As Jonathan Clements explains to Marketwatch, "Seasoned investors don't get nervous when the market declines. Rather, they get excited by the prospect of buying shares at much cheaper prices."3

Remember that buying into the market when prices are low is exactly what you want to do as a successful investor (as you want to minimize buying when prices are at their highest, or most expensive). Dollar cost averaging allows you to buy more when the market is low and less when the market is high, because you make the same contribution to the same set of investments at the same time every month.4

This strategy prevents you from having a knee-jerk reaction to financial reporting, which could leave you buying high or selling low if markets get volatile and change unexpectedly. By creating a smart investment strategy before you begin — and having a plan that accounts for volatility — you won't be tempted to react emotionally.

3. Create a long-term plan

Market volatility could be more of an issue if you needed to get cash from your investments tomorrow. But as a general rule, you should only invest the money you know you won't need for at least five years — which is typically long enough to ride out any short-term volatility.

This means there's no reason to keep an eye on the daily movements of the market. We know the market will fluctuate up and down. And, those fluctuations might look like big fluctuations if you only look at day-to-day activity.

Take a step back and consider the stock market from the bigger perspective. If you plan to stay invested for the long term to reach your goals, whatever happens today will most likely be a blip on the radar five to 10 years from now. So when you hear the news about volatility, don't worry. Take the long view and don't get caught up in the daily hype.

4. Know your own risk tolerance

If you know you can't stand to see dramatic market volatility — even after creating a long-term investment plan — then you may need to take less risks with your investments. The tradeoff is a smaller return, but that might be worth it if you have little appetite for risk and thinking about potential losses keeps you up at night.

Just be careful you don't prioritize avoiding risk over taking the appropriate risks. Risk and return are related.

Volatility is a normal part of the financial markets you'll likely invest in as you work toward your retirement savings goal. While failing to manage that volatility in your portfolio could leave you exposed to unnecessary risk, it's nothing to fear as long as you put the right strategies in place and expect it, so you don't panic when it happens.

Research market volatility

Important Disclosure Information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

Diversification does not ensure against loss.

  1. Investopedia, "Volatility," accessed August 8, 2018. Back
  2. Investor.gov, "What is diversification?"  accessed August 8, 2018. Back
  3. Jonathan Clemens, "Why you shouldn't panic about the stock market volatility," accessed August 8, 2018. Back
  4. James Royal, "Dollar-Cost Averaging: How It Works and When to Use It," accessed August 8, 2018. Back