With 2020 being the year of uncertainly, you can count on market swings to challenge your patience as an investor. Political uncertainty, international conflicts, interest-rate decisions, and economic shifts — here and abroad — can cause market volatility. It’s generally a case of when and not if it happens. But neither the ups nor the downs last forever, even if they feel as though they will. Let’s dive into the four actions you can take right now to best manage your portfolio in a volatile market environment and survive those market swings as you pursue your goals.
4 Steps To Building A Stronger Portfolio - Infographic
Four Steps to Building a Stronger Portfolio
Here are four actions you can take to help you cope with market fluctuations as you pursue your short-term and long-term goals.
Step 1. Develop a Sound Financial Strategy
You need to start with a clear understanding of your investment objectives, your investment timeframe and your risk tolerance. Your goals will determine what is the best investment mix for you. And the amount of time you have to reach your goals will depend strongly on your investment choices. The amount of risk you are willing to take will ultimately decide what comfort level you have if the market goes on a rollercoaster ride.
Step 2. Assess Your Investment Options
When it comes to choosing investment vehicles, most people think of three types of investments: stocks, bonds, and cash alternatives. Many individuals invest in mutual funds and exchange-traded funds (ETFs) to add a mix of stocks, bonds, and cash to their portfolios. An annuity could possibly play a role in your retirement investment strategy. Purchasing an annuity could help boost your income and reduce the risk of depleting your savings in retirement. Selecting individual investments can be a complex process that requires specialized knowledge, time, and attention.
Step 3. Utilize Fundamental Investment Tactics
There are tactics you should consider to help manage risk, smooth out investment returns, and improve the potential performance of your portfolio over the long run. Diversification, asset allocation, and dollar-cost averaging are methods used to help manage investment risk. They can also help reduce the reaction to act emotionally during periods of market volatility. Let’s break them down.
Diversification includes investing in different investment vehicles in an attempt to limit exposure to losses in any one sector of the market. You could, for example, divide your stock portfolio exposure between value stock, dividend-yielding securing or international investments.
Asset allocation involves strategically dividing a portfolio into different asset categories — typically, stocks, bonds, and cash alternatives — to seek the highest potential return at a particular level of risk. Your allocation should change over time based on your age, time frame, risk tolerance and other factors.
Dollar-cost averaging involves investing a set amount of money at regular intervals, such as on a monthly basis. By investing the same amount consistently over time, you are able to buy more shares of an investment when the price is low and fewer shares when the price is high, which may result in a lower average cost per share, regardless of whether the market is going up or down.
Step 4. Put It All Together.
Although past performance is not indicative of what will happen in the future and is not a guarantee of future results, we can learn from how different types of investments have performed over time — and in different economic conditions and investment climates to help make investment decisions.
When developing your financial strategy, it’s important to think about how overall economic conditions might affect your investment portfolio. Having a sound financial strategy in place may be the best defense when events shake up the markets. This might also help prevent you from making emotion-based investment decisions.
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