The investment markets have been particularly volatile recently. In fact, CNBC reported in April 2018 that the stock market hasn’t seen this much volatility since the financial crisis of 2008.
This has left many investors feeling uneasy.
The biggest challenge with investing is getting wrapped up in the emotions of the market. People tend to look at their money emotionally. It symbolizes the cottage, their family trip or a new home. When the market goes up they see the realization of their goals and when it goes down they see them circling the drain.
When you use your emotions to invest it is easy to get in over your head. The rollercoaster of the stock market is a tough ride when you panic and sell every time there is a dip. Thankfully, there are a few things you can do regularly that will help you stay on an even keel even when the stock market is going up and down like a yoyo.
- Complete a personal investment risk assessment
This is a questionnaire that you can fill out before you start investing. It asks a series of questions that will help you figure out where you stand as an investor. Some people are comfortable with a lot of risk, while others prefer to protect their money in safer investments. Fill out this questionnaire when you are feeling calm and level-headed. That way you can look back on it to help you stay the course when you are feeling emotional about your investments.
- Buy pooled investments
Pooled investments (Mutual Funds, ETFs etc.) allow you to pool your money with other investors and buy into multiple and varied investments. This helps spread the risk around so that if one stock tanks your other investments will help balance out your portfolio. As the age old saying goes: Don’t put all your eggs in one basket.
- Rebalance annually
Get into the habit of taking a good look at your investments every year. When times are good you should be taking the gains and sheltering them. When the stock market is down, buy into profitable companies when their stock prices are low.
You also want to make sure you build a portfolio that has both equities and fixed income investments. During your yearly review you can look at your stocks and make sure that they match your risk tolerance.
Picking a specific time of year to rebalance your portfolio is also important. That way you aren’t tempted to act emotionally if there is a dip in the market. People who take the time to rebalance their investments yearly typically do 2% better with their investments.
- Dollar/cost averaging
When it comes to the stock market having a fixed amount that you are willing to spend and buying a little bit at a time is your best bet. When the market is high you will get fewer stocks for your money and when the market is low you will get more. Those who practice dollar/cost averaging tend to do better in the stock market than those who buy emotionally and without a plan.
- Have a financial plan
When investing in the stock market it is always a good idea to have a financial plan. Decide what you are trying to do with the money you are investing. Having a time frame and a financial goal will help you figure out the amount of risk you would like to take.
Talking this over with a financial advisor will help you create a solid plan and they will also be able to give you professional advice about your investments. Speaking to a neutral third party can help take emotion out of the equation and make sure that you buy into the investments that will help you reach your financial goals.
Investing in the stock market is like watching a little boy walk up a hill with a red yoyo. The yoyo will always be going up and down, but the little boy is on a constant, steady incline. It is important that you remember that, like the boy, the stock markets go up over time but reacting to the yoyoing of the market will just make investing gut-wrenching and unproductive.
When it comes to the stock market stay the course and talk to a professional. Financial advisors are there to help when it comes making the best choices possible for your money.
Daren Givoque, CDFA & Partner