The industry defines market volatility as the fluctuation of a security or index within a specific set of time. For some traders, high volatility yields can be great rewards day-to-day. But, over the long term, investors may become anxious about the nature of such a volatile marketplace. Investments like retirement or education negatively impact over the long run from high market volatility. Fortunately, there are some strategies an investor can use to cope with market volatility.
Investments such as retirement or education work best over the long term. The longer the cycle these investments have to mature, the longer the investments can be shielded by market forces. Therefore, invest early in life.
However, for investors who need their investments soon, it is important to remember the market naturally rises and dives. A drastic move can hurt those investments in an investor panics. Despite some anxiety, it is better to weather the storm of high market volatility until the market bounces back.
Diversification and Spreading Out
Diversification refers to investing in a mixture of stocks and bonds. To simplify, an investor should not have all their investments in the same pool. If they diversify how their investments are spread out, the market’s fluctuations may impact some stocks and bonds within the same portfolio more than others. Although it can be hard to see a stock and bond suffer, if an investor diversifies, then the damage will be thin to their overall portfolio.
Similar to diversification, it is important for an investor to keep their investments in a non-concentrated sector. Entire sectors of an economy may ebb and flow dramatically due to numerous economic factors. If an investor has stocks and bonds in a single market, like software, that could be problematic if such a market faces a natural downtown.
Pay Down Fixed Expenses
When the market is highly volatile, it is crucial to keep a focus on immediate financial needs. Bills, mortgages, lines of credit, and other fixed expenses need to be paid for immediately. If an investor panics about money lost in the market, then the investor may lose a handle on their fixed expenses.
One way to cope with high market volatility is to pay down fixed expenses. For example, during a volatile market, perhaps an investor should pay down their mortgage or car. That way, you minimize costs over the long run as the market bounces back.
If an investor is nearing retirement and market volatility is high, then producing a new income stream is a path forward. One strategy is investing in an annuity. An annuity is an investment that pays the investor income in sums over time. Annuity investments can provide a fixed or variable income stream. Property-based investment strategies, such as rents or reverse mortgages may also work.