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4 Strategies for Investing in Volatile Markets

June 22, 2020

Market volatility and declines in equity prices have many investors questioning how to navigate the risks and opportunities based on their financial and investment situation. Keep in mind your investment strategies should align to what's important to you along with your comfort with risk. Here are some actions for investors to consider during market volatility.

1. Diversification

A focus on diversification can, in our view, be helpful in navigating ongoing volatility while staying aligned to your long-term goals. The foundation of a well-designed investment portfolio is its asset allocation, which refers to how your money in invested across broad asset classes, such as bonds, stocks and international investments.

With different asset classes reacting differently to market and economic events, the goal of asset allocation is to focus on achieving solid long-term performance and to balance return potential with the risk you are taking.

Diversification through asset allocation cannot eliminate risk and volatility, but it can help reduce it. For example, global markets will likely progress on different timelines, warranting diversification. Additionally, diversifying among bonds can provide income and stability to your overall investment portfolio. Therefore, we recommend owning a variety of stocks and bonds to help cushion market swings.

As you work with your financial advisor to determine the mix of stocks and bonds that align your portfolio with your goals, our Investment Policy Committee’s (IPC’s) investment pyramid can help you organize your decisions and understand how a wide variety of asset classes play particular roles in an appropriately diversified portfolio.

1 Alternative investments and stocks trading less than $4 align with the Aggressive investment category, but they are not recommended.

2 Large-cap stocks that do not pay a dividend are in the Growth investment category.

Diversification does not guarantee a profit or protect against loss in declining markets.

2. Systematic Investing

Consider systematic investing and rebalancing instead of trying to time the bottom. Pullbacks in stock prices present opportunities for investors to use excess cash targeted for future investments and potentially benefit from this decline over the longer term.

Systematic investing is the process of investing a fixed dollar amount at regular intervals. While sys-tematic investing does not guarantee a profit or protect against loss, it helps investors buy more shares when prices are low and fewer shares when prices are high. This typically results in a lower average cost per share than if a constant number of shares are purchased at set intervals. It is fitting for investors who wish to:

  • Invest gradually over time
  • Accumulate more shares when prices drop
  • Lower the average purchase price of their investments

3. Portfolio Rebalancing

As unsettling as daily market swings can be, volatility is part of investing. Ignoring short-term daily fluctuations and systematically aligning asset allocation weightings to match risk tolerance through rebalancing can help you maintain the mix of bonds and stocks appropriate for your situation and help cushion the impact of heightened volatility over the long term, regardless of its source. By focusing on quality and diversification using a wide variety of asset classes and rebalancing them regularly, you can build and maintain a solid portfolio designed to help withstand the market’s swings over time.

4. Align Cash Levels with Your Goals

Cash can be valuable during times of volatility, helping provide funds for everyday spending and unexpected expenses, while reducing the need to sell other investments while they’re down in value. That said, it is important to understand the roles of cash and ensure you do not have too little or too much.

Ultimately, your cash strategy can be a key factor in your long-term financial success. To determine the role of cash in your financial life and how much you should have, we use the acronym USES:

  • Unexpected expenses and emergencies: Cash used for situations such as a job loss, a home repair or an unplanned medical expense
  • Specific short-term savings goal: Cash dedicated for a goal that will occur within the next year or so, such as a wedding or vacation
  • Everyday spending: Cash used to provide for your lifestyle, including day-to-day spending needs such as groceries, utilities, entertainment and your mortgage/debt payments
  • Source of investment: Cash used as an asset class and as a source for investment opportunities

The one constant investors can expect is change, which is why it's important to regularly review your investment strategy with your financial advisor. Working together, can help you ensure your investment strategy remains aligned to your goals and that you stay on track.

More Resources:

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