After one of the longest bull markets in history, stocks experienced some major ups and downs toward the end of 2018. This increased market volatility grabbed headlines and caused some investors to feel anxious about potential losses to their portfolios.
While it’s a natural reaction for investors to wonder if and how national and global news may affect their savings, it’s important to take a step back and remember that more frequent stock moves are actually a return to usual market activity. And historically, these swings are even healthy for the portfolios of long-term investors because the markets tend to rise over time.
If you are an investor with multiple decades to prepare for retirement, here are three steps to keep in mind when the market moves significantly.
1. Revisit your views on risk.
There’s nothing like a significant market downturn to remind you that investing involves risk. Market swings provide an opportunity to re-assess the level of risk in your portfolio and determine whether you still think the amount is appropriate for your circumstances. The level of comfort (or discomfort) you feel when the market moves up or down substantially is a good starting point on whether your portfolio fits your risk profile.
2. Remember that time is on your side.
In theory, the longer you have to let your money work for you, the less concerned you should be about short-term market moves. Fluctuations in stocks are nothing new. And historically, markets have always recovered from losses incurred during corrections or bear markets.
3. Put volatility to work for you.
Market volatility can work to your benefit by tapping into the power of a strategy called dollar-cost averaging. Here’s an example of how it works: Say you invest a fixed amount of money at regular intervals, regardless of market conditions. When the market dips, you can purchase more shares. And when the market rises, you can purchase fewer. The goal is to end up with more shares, often purchased at an overall lower cost per share than if you had invested all the money at once. Then the shares have the potential to increase in value over time. (Dollar-cost averaging does not assure a profit or protect against a loss in declining markets.)
This strategy is one example of how volatility may work in your favor if your investments move up or down in the short-term, while eventually recovering lost ground in the long-term. If you make regular contributions to a workplace retirement plan, IRA or other investments, you are likely already using this strategy. If not, consider this example as motivation to explore whether you can make consistent investing a goal for this year.
4. Meet with a professional.
If you are concerned about the recent performance of the markets, it may be a good time to sit down with your financial advisor. Together you can talk about your financial goals for the future and what steps you can take next to start on the path to achieving them.
