With 2018 ending in a down-market, many entered into 2019 with feelings of apprehension towards the economy. During a volatile or down-market, the greatest concern for many investors is where they should invest. In addressing that concern, it is significant to apply a few investment strategies mentioned below to maintain a steadily growing investment portfolio.
It is commonly found that a fear of market volatility results in many storing cash away for a longer period of time than necessary. However, that doesn’t prove to be a solution to a volatile market. It is difficult to gauge exactly when and the length of the bear market before taking off to a bull market. It is impossible to time the market when buying and selling investment positions. The most ideal option is to integrate yourself to be “in the market” rather than “time the market.”
For savvy investors, even during a down-market, they understand the importance of holding onto your investment position and wait for the market to pick up value to regain their losses. In fact, the majority of savvy investors invest more during a down-market to purchase at a lower price. The difficulty comes from not only cognitively understanding the principles but being able to put it into action by overcoming the psychology of investing where investors’ actions are driven by emotion, either by fear of loss or desire of gaining max.
For any given investment asset classes, it is followed by some type of market risk as there are fluctuations, highlighting the importance of diversifying funds into different asset classes to withstand any impending market fluctuations. For example, all investment options—stocks, real estate, bonds, and insurance—have different underlying investments that fluctuate based on either the interest rate or stock performance. For the various available investment options, as some can be dependent on the economy affecting the rise and fall of interest rates and stock rates, it is crucial to have your investment diversified into different asset classes to lower risk. Many misunderstand and think that investments are diversified if different allocations are selected. To illustrate, investing in different allocations within mutual funds or investing in different company stocks within the investment vehicle of stocks, does not equate to a diversified investment portfolio. It is important to choose different asset classes to truly create diversification within your portfolio.
Another detail to keep in mind is the investment horizon as well. For example, long-term bonds may pay a higher yield, but in a volatile market, they are more volatile compared to short-term bonds. If an individual invests all their funds into long-term investments for the sake of receiving higher yield, it makes it difficult to pull out cash during a down market and may easily result in selling their investment positions at a loss if in need of cash. In a down-market, if possible, it is important to wait out during a down market without selling your investment position because it creates a high chance that a loss will not be considered a “realized loss,” but when there is not much liquid asset available then, individuals are forced to sell their investment position during a down-market or during a penalty period creating a loss. It is a core vital to have available liquid cash within the whole of an investment portfolio, diversified by asset classes and varying maturity times.
Market fluctuations will inevitably come and pass, it is a matter of preparing your portfolio well to withstand the ups and downs when it comes. As Benjamin Franklin said, “An investment in knowledge pays the best interest.”