After nearly a decade of steady growth and soaring stock values, the marketplace has finally entered correction territory. For those who have grown accustomed to a bull market, knowing how to invest in a volatile market can be challenging.
Smart Investing Tips for Up and Down Markets
If you've paid attention to the stock market over the past few weeks, you've probably had a bit of an uneasy feeling in your stomach. After years of steady gains, we've experienced some pretty incredible volatility.
Between February 1 and February 12, the Dow Jones Industrial Average experienced two single-day trading losses of 4-plus percent, as well as one 2.54 percent loss. Each of these losses was followed by steady swings in the opposite direction, with a 2.33 percent gain on February 5.
If you zoom in, there's even more instability. The markets have been violently swinging up and down on what seems like an hourly basis. While day traders may find this fun, the rest of us are a little uncomfortable.
This, folks, is what you call an extremely volatile market. However, it's nothing new and you shouldn't be alarmed. It can, however, be challenging to interpret and tough to stomach.
Here are a few suggestions for smart investing in choppy waters:
1. Keep Perspective
It's important that you maintain a positive outlook and avoid letting a few days (or even months) of losses lead you to panic. If you study the trajectory of the market over the years, it's always improving. Sure, there may be brief ups and downs (2008-2009 is a prime example of a down period) but the market always recovers.
While major SPDR ETF funds have been bearish over the past few weeks, the long-term outlook is still quite bullish. When you take a step back and give yourself a little room to breathe, you'll realize that everything is going to be just fine.
2. Invest for the Long-Term
Your age should be more of a determining factor in your investing strategy than the current state of the market. If you're 60 years old and getting ready to retire in the next couple of years, then yes, volatility is scary, and you need to think about moving your nest egg into more stable investments (like bonds or real estate). However, if you're 30 years old, you still have a few decades to ride things out.
Traders focus on the day-to-day swings of the market. Investing is about the long-term. Again, the more you shift your perspective to align with reality, the less likely it is that you'll be emotionally impacted by the ups and downs of the market.
3. Use Dollar Cost Averaging
There are two basic investing strategies: dollar-cost averaging and lump sum investing. With dollar-cost averaging, you're not trying to time the market, per se. Your goal is to simply invest consistent sums of money at regular intervals. You expect to invest at both peaks and valleys; the assumption is that everything will eventually even out.
While it's tempting to try and time the market when markets spike and fall, don't do it. This is the time when you really need to be implementing dollar-cost averaging to hedge yourself against risk.
4. Stop Checking the Tickers
Psychologically, there's nothing healthy about constantly checking stock tickers and watching the charts. It becomes addicting and leads to constant anxiety and a rollercoaster of emotions.
You aren't a day trader, so the ups and downs have no real effect on you. Check in every couple of days, so that you know what your portfolio is doing, but don't let it consume you.
Play the Long Game
Investing is a long game. You have years to make up for short-term losses, so there's no need to fret over the volatility of the market. Smart investing principles take periods of volatility into account and the best thing you can do is remain calm, steady, and pragmatic.