Investing in volatile stock markets is a challenging and emotionally draining endeavor. It’s also often a great way to supercharge the returns on your portfolio by taking advantage of investment opportunities.
In the past month, the stock market has plunged more than 10% leaving many investors heads reeling as they’ve watched massive amounts of wealth evaporate from their portfolio. The S&P 500 is now back down to June 2019 levels, completely erasing 9 months of gains. A lot of the current stock market volatility can be explained by Coronavirus. But what should you be doing with your investments?
How to invest in a volatile stock market
A volatile stock market can be an extraordinary opportunity to make money if you can keep a clear head. However, that’s much easier said than done!
Losing money is an intensely painful emotional and psychological experience, and we tend to have irrational reactions to it that can further compromise our financial security. When it comes to investing in a volatile stock market, you want to keep emotions in check so you can identify opportunities for good investments. However, it’s equally important to recognize when the volatility becomes too much for you and you simply need to step back!
Here are some investing strategies to keep your cool in volatile stock markets.
1. Recognize when you’re having an emotional reaction to market turmoil
We all believe we’ll be wiser and calmer than we actually are in the thick of investing. When the market goes up, we believe we are a genius stock picker that can’t make a wrong play. When the stock market goes down, we become certain we are terrible at investing and shouldn’t have any money in the market at all.
One of the first things you should do in the midst of market volatility is acknowledge that your judgment is going to be a little clouded. When you’re approaching investment decisions, take a moment to pause and ask yourself if you’re letting fear, anxiety, or excitement make the decision for you.
There is never a good time for emotional trades, but a volatile stock market is the worst time! Errors or mistakes will be magnified, so you have to be twice as vigilant to avoid them. On the upside, opportunities for profit is also magnified, which is the fun of volatility in the first place.
2. Take a break from checking your portfolio
One of the best things you can do if stock market swings are making you ill is take a break from watching the show.
If you’re not making any trades, don’t even open your brokerage account. There’s no reason to watch the ups and downs if you don’t have to! If you can’t stay away entirely, make a point to avoid as much as you can when the market’s open, and instead catch up on the news after market close. You can be aware of all the chaos that’s going on without being a part of it.
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This is especially true if you use a robo-advisor like Wealthsimple. Since they’re making the investment decisions for you, you don’t need to monitor your portfolio! Just exit the app and let your investments do their thing. You can update your net worth numbers once the dust settles.
3. Consider your long-term investment strategy
To keep a clear head in the mid of market turmoil, remember this: you’re in it for the long haul.
Your investing horizon is decades, not days, so don’t let a few volatile weeks or months throw you off course. Time is on your side, and you can wait this out. Remember that volatile stock markets including dips, corrections, downturns, and yes, even crashes, are all normal events. They suck to go through but they’re not unusual or even that uncommon!
Experiencing downturns in the stock market is part of investing. You have to be willing to stay in the game even when it gets dicey in order to reap the rewards long term!
4. Often the best course of action is inaction
Furthermore, your emotions are likely telling you to do the opposite of what you really should be doing during market volatility. Your gut might be telling you to sell when what you really should do is hold on. Or you might be motivated to buy because you think we’re at the bottom when what you really should do is hold out a bit longer.
When in doubt, wait and see. Look again tomorrow. If things are still crazy tomorrow, wait and see again. Keep waiting and seeing until you can see clearly. I promise an extra few days or weeks or even months is ok to stay on the sidelines. The stock market will always be there. There will always be time and opportunity to make money. You don’t have to do it only during the messy times!
If you’re about to make a trade and doubting yourself, the answer is probably not to go through with it. After all, would you be doing the same thing if the market wasn’t tumbling off a cliff? Sometimes the best thing you can do when it comes to investing in volatile stock markets is to not make any new investments at all.
5. Make small trades for securities on your wishlist
It might be hard to believe when you’re in the thick of it, but a stock market downturn is always a great buying opportunity.
A stock market dip is a great time to pick up shares of companies you’ve wanted to own, but couldn’t justify paying peak market prices. Now is the time to add watchlist favorites to your portfolio at a discount. Likewise, it’s a great time to pick up dividend-paying stocks. Their dividend payouts will be at higher percentages while the stock prices are down, which means you can get a better return on your investment.
5. Focus on saving cash
If the stock market ride is too much for you to handle, hoard cash! Now is a great time to deposit cash to your brokerage account, but hold back on investing in securities until things calm down.
You can also use this time to hold back on investing and instead direct extra funds to pay down debt or build your emergency fund. Having a bigger cash cushion will help you feel more secure when things get wild, while also reducing your need to withdraw your investments at an inopportune time for an unexpected expense.
No matter what the market is currently doing, it’s still the best place to build long-term wealth. While investing in volatile stock markets can seem scary, remember it’s a normal event and the best thing you can do is stick to your trading plan and wait it out!