Market volatility is a constant factor for anyone who invests their hard earned money. It does not go away, but there are ways to manage it effectively. As of writing this the TSX composite is down -7.13%, the S&P 500 is down -9.34%, and the Dow Jones is down -9.51% in just the last 5 days due to coronavirus fears. Where will they be by the time I'm done writing this? Who knows. What I do know is that volatility will remain in the short term, mid term, and the long term for any investor. Here are some ways to manage it effectively.
1. Make a plan and stick to it
Many investors when initially buying investments go through a risk profile to see how much risk they should be assuming. This is found out by figuring out the time horizon of their investments, their ability to handle certain market fluctuations, desired liquidity, and their ultimate goal for the investment. Once your risk profile is determined and your investment plan is put in motion, it is best to just avoid all of the noise on social media, the news, and around the water cooler and stay invested through the good times and the bad as long as your risk profile or time horizon has not changed. Timing the market will be virtually impossible to consistently get right every time the market goes up and down, and more often than not people will end up buying or selling based on emotions. When looking at the #'s we can see that by simply staying invested in the long run pays off regardless of certain catastrophic world events.
2. Diversify
Diversifying investments with proper asset allocation is always important so we don't keep all of our eggs in one basket. You should invest in different areas of the world, different sectors, different asset types, hold non-correlated alternative investments, and different sized companies to lower the volatility on your investments so not to be completely exposed to one specific asset class. Depending on one's risk profile, one should have a certain level of fixed income in the form of bonds, cash, and/or GIC's in their portfolio to lower the volatility and provide additional downside protection as well.
3. Dollar Cost Averaging
Using dollar cost averaging is a great way to invest for people as it takes the emotions and market timing out of question compared to if you are a lump sum investor which runs the risk of buying at a high, or avoiding to buy altogether. So instead of buying your investment all at once at potentially a high price, dollar cost averaging spreads out the purchase of that investment in smaller dollar amounts. Whether you set up a weekly, biweekly, or monthly plan to contribute the smaller amounts, it will likely lower the average cost of your share prices in the long run all while reducing investment risk and more efficiently manage market volatility. It takes the timing and the guesswork out of the equation and it puts your investing on auto-pilot. Here is an example of someone with $8000 to invest in January who invests the full amount compared with spreading the purchases out over 8 months.
The unit cost ends up being the same in January as it is in August, but with dollar cost averaging with monthly investments it allows a person to buy dips in the share price, and in this example lowers the average unit cost to $9.61.
4. Talk to your advisor
If the current volatility in the market and the fear of coronavirus has got you shook up, then just talk to your advisor. They'll be able to talk you through different market scenarios and be able to put the emotions aside and remind you of your investment plan and the importance of sticking to it. Chances are any potential losses may not be as bad as you think on your own portfolio compared to what you are hearing in the news.
"...if history teaches us anything, it’s that great investment gains go to those who are diversified, optimistic and patient…" (Humble Dollar)
-Marty Metz, CFP, CLU
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