How to Invest in a Volatile Stock Market

Quick Answer

Stock market volatility is a given in the short term, but when it becomes prolonged, it's important to avoid acting rashly and to stick to your strategy, albeit with minor adjustments based on your situation.

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The stock market is volatile by nature, so it's common to see fluctuations in the short term. But when that volatility increases to the point where it's entering bear market territory, it could cause you to rethink your investment strategy.

Depending on your situation, though, you may not need to do anything. If you do, it's important to avoid rash decisions and significant deviations from your original strategy.

What to Do With Your Long-Term Investments

If you're investing for retirement or some other long-term goal, you may not need the money for a decade or more.

In this instance, you may not need to make any changes at all in a bear market. The average length of a bear market is less than 10 months, according to Hartford Funds. Comparatively, the average length of a bull market is 2.7 years, with the most recent one lasting more than a decade.

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So, while your portfolio may take a hit in a volatile market, it'll likely recover long before you need the money. With that said, there are some steps you could consider taking:

  • Make sure your portfolio is well diversified. It's crucial for investors to have a good mix of assets in their portfolios to avoid taking on too much risk. If you have 100% of your funds invested in stocks, for instance, it may be a good idea to branch out and also invest in bonds, real estate, commodities and other asset classes.
  • Consider some low-risk investments. If you want to preserve some of the wealth you've accumulated to get a better start when the market goes back up, you may consider investing a small portion of your portfolio in lower-risk assets, such as Treasury securities and government bonds. These typically offer a low return, but won't go negative.
  • Rebalance your portfolio. Market fluctuations can affect the mix of investments you have to the point where it no longer aligns with your original target. For example, if you wanted 70% of your portfolio in stocks, 20% in bonds and 10% in other assets, but your allocation is now 60% stocks, 25% bonds and 15% other assets, you may want to sell off some holdings in bonds and other assets and invest more in stocks to get back to your original target. Note that many brokers offer rebalancing as part of their service offerings.
  • Keep investing. You may consider cutting back on your investment contributions due to uncertainty, but as the market starts to see more consistent gains again, you'll benefit from the "cheap" prices now.

How to Manage Your Short-Term Investments

If you're investing for the short term—maybe you're retiring in the next few years, or you're investing in a brokerage account with intentions to use that money for another short-term financial goal—increased market volatility could have a much greater impact on your plans.

Here are some potential steps you could take, depending on your situation and your current investment strategy:

  • Avoid trying to time the market. If you're hoping to take advantage of price swings to secure short-term gains, it can be much harder than you think during times of increased volatility. If you're not careful, you could end up with big losses instead.
  • Keep your portfolio diversified. As with long-term investors, it's important for short-term investors to keep their portfolio diversified to avoid taking on too much risk, which could turn into above-average losses. Take a look at your portfolio and look for small adjustments you can make to improve diversification across multiple asset classes and stock sectors.
  • Look for investments that perform well during increased volatility. Some stocks and asset classes tend to perform better than others when market times get tough. For example, investing in blue-chip stocks with high dividend yields could help mitigate some of the volatility in stock prices. And if there are external economic shocks that are affecting the market, investing in other assets, such as real estate or precious metals, could help counteract some of the losses you're experiencing in stocks.
  • Keep investing. If you're able to, you can "buy the dip" by continuing with your current investment contributions. Dollar-cost averaging is a common approach for investors during times of volatility. It involves making the same contributions every month regardless of how the market is performing. If you're buying a specific stock or mutual fund, it allows you to purchase more shares when prices are low and can reduce the average cost per share overall.
  • Cash out some of your investments. If you're concerned about potential economic issues that are affecting the stock market and would prefer to have cash for emergencies, it may make sense to cash out some of your portfolio. Try to avoid making this decision based on anxiety, though. Also, keep in mind that if you pull out at the wrong time, you may lock in losses that you could've recovered if you hadn't sold.
  • Preserve your capital. If you're investing for retirement and are planning on getting out of the workforce in the next few years, it may make sense to shift some of your holdings into safer investments to avoid large losses. Unlike younger investors, you may not have the luxury of time to recoup those losses.

Is Now the Time to Make Changes?

Depending on your current situation and your goals, increased volatility in the market may or may not be the right time for you to make changes to your investment strategy.

Consider those factors and the tips above to make decisions based on what you need the most. Whatever you do, it's crucial to avoid panic selling or trying to time the market because you could end up regretting the decision later on.

Additionally, now may be a better time than ever to consult a financial advisor. While you'll likely have to pay a fee, an experienced professional can provide important context for your situation and give you objective advice on how to better achieve your goals.

The Bottom Line

Because every investor's situation is different, there's no one-size-fits-all approach during times of increased stock market volatility. Take your time to review your situation, goals and current strategy and consider ways to make the most of the situation. Also, do some research on what's happening in the market and learn about the different approaches that can help you still accomplish your objectives. If you feel like you need some help, shop around for a financial advisor who can assist you in moving in the right direction.