As you might have noticed, markets took a plunge last week and piled on more this week, which makes it a good time to explore what it means to practice disciplined investing, and why sticking to your investment strategy can help you maximize returns while protecting you from unnecessary losses.
In times of high volatility in the markets, it’s not uncommon for investors to second-guess their investments, or even abandon strong long-term positions out of fear that they might suffer losses in the short-term.
While it can be unnerving when the markets drop, experienced investors know that having a solid investment strategy and diversified holdings are crucial to minimizing risk and avoiding mistakes like trying to time the market.
As you’ll learn, during periods of high market volatility it is important to stick with your investment strategy and confer with your financial adviser about what is right for you and your investing goals.
Diversification of an investment fund is the first line of defense against uncertainty and volatility in the market. This is the process of managing risk in a portfolio by using different classes of assets that do not typically move in lock step.
Common approaches to portfolio diversification include holding multiple types of securities, in multiple industries and countries. Each of those approaches can be considered a different asset class with diversification benefits.
Put simply, it’s not placing all of your eggs in just one basket. By spreading out your investments, in the event of a market downturn you can hope to avoid the worst of your losses and still pick up profits in the long-term. You can mitigate risks by spreading out funds to prevent major losses if the markets sour on any certain sector or investment.
While diversification is an important part of protecting your long-term investments, it is also important to take advantage of time in the market, versus trying to time the market.
Dangers of timing the market
Investopedia has a good definition of timing the market, but roughly it means trying to pull out of high-performing assets and securities before anticipated market downturns, with hopes of avoiding losses before getting back into the market when volatility settles out.
In other words, by trying to predict how the market is going to behave and investing accordingly, traders sometimes try to find larger returns and minimize losses. However, market changes can occur rapidly and seemingly at random; this can be the case both when the market falls, but also when it surges.
The danger of timing the market is that you could pull your investments in anticipation of a market downturn, only to find that the bulls continue to charge forward. If that were to happen, you would lose out on prime earning opportunities in the form of big gains.
Rather than trying to time the market, remember your long-term investment goals and consult with your financial adviser in the event of a downturn.
Time as an asset
Instead of trying to time the market, you should focus on time in the market. Markets have recently risen to new record highs, but just this past week we saw the way markets can quickly reverse. By nature, markets expand and contract over time and go through periods of increased volatility. Moreover, we are gradually leaving a prolonged period of low market volatility.
Most sound investment strategies rely on having adequate time in the market to maximize profits and ride out periods of instability. While there’s no guarantee of success in the markets, historical data shows us that even after periods of sharp correction or recession (such as in 2008) markets bounce back, given enough time and patience.
Stick to the game plan
Above all else, disciplined investing is following the investment plan you and your financial adviser have come up with together, and not deviating during times of volatility and uncertainty. It’s not uncommon for investors to have doubts and react emotionally to precipitous drops in the market.
While it can be unnerving to see your investments take a hit in a market downturn, by changing your asset allocation during a downturn or period of high volatility is risky, as there’s zero guarantee that you will find a “better” investment, and in fact might put your long-term gains at risk.
Most importantly of all, simply having a strategy will make all the difference, and starting now will help you maximize returns by maximizing time in the market.
Don’t wait. Contact Holdfast Wealth Management today.