When the market shows signs of turbulence, investors tend to get nervous. Anyone would. However, experts offer some tips on how to handle this situation to avoid losses or bad moves.
No one knows for sure what will happen this year and next in the U.S. stock market. According to Bloomberg, even economists themselves have divided opinions about the future and the possibility of the economy falling into recession.
What is certain is that these are difficult times for investment in the stock market, given the existing uncertainty. Macroeconomic data do not yet show the strength that the Federal Reserve expects to stop raising interest rates.
Everything is very uncertain. A very low unemployment rate accompanied by very high wages in companies. The expected slowdown in the economy has not yet begun. On the contrary, the January figures indicate the opposite.
Economists agree that there will be weak growth in the U.S. economy this year. What they do not agree on – and this is rare, since they almost always have more or less similar views – is the extent of such weakness.
Indeed, over the past two years, the gap between the best and worst forecasts for U.S. real GDP compiled by Consensus Economics has widened. The two-year high for growth has been 2.2% and the low is estimated at a contraction of 0.7%.
So what is to be done?
There is no need for alarm either, as episodes of market volatility for long-term investments are normal, albeit disconcerting. A keen investor can learn from them by studying periodic market declines, their frequency and magnitude.
Of course, this is easier said than done. Those who have their money invested in a particular stock or asset are the ones who know what it feels like when their asset depreciates. The question immediately arises: Should I do something?
Here are some tips on what actions to consider minimizing the impact of volatility and not die of a nervous breakdown in front of the monitor.
Analyze volatility in the market
Don’t despair. Resist the temptation to dump the asset based only on the most recent market data. It is not advisable to sell shares during bear market episodes, without first making a deeper analysis of the situation.
Temporary losses could become permanent. One must try to remain emotionally firm, without losing focus of the investment strategy initially outlined. This is not easy, of course, but it can be very favorable for the investor’s portfolio.
Nor does it mean that the investor should blindly cling to a certain stock, no. It does not mean that the investor should blindly cling to a certain stock. It is about not losing the initial investment perspective. In every market there are ups and downs. The suggestion then is not to be affected by noise and unfounded fear.
Furthermore, if it is a long-term investment, the long-term projection must be maintained. Just as markets go down, they also go up. It is necessary to analyze the situation and see if the initial perspectives of the investment are maintained in a longer term.
Even bear market cycles, with declines in excess of 20%, are historically relatively short compared to bull markets. So instead of getting agitated, experts recommend ignoring the noise altogether and focusing on your plan.
Reviewing risk tolerance and risk capacity
Every investor should periodically review his or her risk tolerance. That is, their ability to emotionally control price swings. While risk capacity is the investor’s financial ability to take a loss.
When a market downturn occurs, it is good to reconsider our individual risk tolerance. But it is best to let the waters calm down and analyze the situation more calmly.
However, it is always advisable to take your risk capacity into account so that you do not commit financial imprudence. It is always worth asking ourselves whether we have enough cash to cover our short-term objectives for the time being.
Remember that you should only invest in the stock market that fraction of your savings that you will not need in the near future. It is not advisable at all to gamble with money to make a market. It is safer to invest that money in safer and more stable assets.
For example, certificates of deposit, Treasury bills or money market funds. If the investor is a retiree, it is best to insure living expenses for at least 6 months in a savings account.
You could also place your money in bonds that mature when you need your money. This way you won’t have to worry about current market volatility and keep your living expenses covered.
Diversify your investment portfolio
This is extremely important because you don’t want to put all your eggs in one basket. Market volatility is often an indicator of how well diversified investors’ portfolios are.
Periodically review the products that make up the investment portfolio to see if the portfolio needs to be updated and balanced. As markets adjust, it is necessary to make adjustments to investment strategies as well.
Observing the performance of a given asset and its combination with others is always advisable. There are assets that the investor may need to substitute or reinforce to improve the target asset allocation.
Consider assets that offer greater stability
There are some defensive assets that can help elevate the stability of the investment portfolio. These include cash and cash equivalents, Treasury bonds and other U.S. government paper, which are considered safe assets.
So when one or more stocks fall in the market, these assets serve as a cushion to withstand the losses. Stabilizing the portfolio is part of every responsible investor’s strategy.
On the other hand, if at some point you expect to take money out of the investment portfolio to spend it, it is advisable to hold products that are relatively liquid. For example, short-term bonds, which are less volatile than stocks. This way you will avoid selling stocks in a bear market.
Rebalance the portfolio according to need
There are changes in the market that can take the investor away from his original objectives. There are deviations that no matter how small end up misaligning an entire strategy and thus fail.
It is as simple as the assets that perform better are strengthened and those that do not are fully or partially sold. Stock rebalancing involves selling those positions that are overweight relative to the rest of your portfolio.
Instead, you should reinvest the gains from the best performing stocks into other underweight stocks. This is good to do with some regularity.
Adapt trading to fast-moving markets
When trading in times of volatile markets, you have to take into account the current conditions when entering an order. Therefore special care should be taken when the market opens and when it is closing which are usually the most volatile times.
You should trade with smaller positions and work your way up. As the stock price fluctuates buy or sell shares and take defensive steps. This is to protect an unrealized gain or also limit potential losses during a position.
In other words, issue stop orders and stop-limit orders. Both types of orders help the trader to automate his decision making and avoid losses due to an oversight during the session.
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