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Handling Market Volatility
Conventional wisdom says that what goes up, must come down. But even if you view market volatility as a
normal occurrence, it can be tough to handle when it's your money at stake.
Though there's no foolproof way to handle the ups and downs of the stock market, the following common sense
tips can help.
Don't put your eggs all in one basket
Diversifying your investment portfolio is one of the key ways you can handle market volatility. Because asset
classes typically perform differently under different market conditions, spreading your assets across a variety of
different investments such as stocks, bonds, and cash equivalents (e.g., money market funds, CDs, and other
short-term instruments), can help reduce your overall risk. Ideally, a decline in one type of asset will be balanced
out by a gain in another, but diversification can't eliminate the possibility of market loss.
One way to diversify your portfolio is through asset allocation. Asset allocation involves identifying the asset
classes that are appropriate for you and allocating a certain percentage of your investment dollars to each class
(e.g., 70 percent to stocks, 20 percent to bonds, 10 percent to cash equivalents). An easy way to decide on an
appropriate mix of investments is to use a worksheet or an interactive tool that suggests a model or sample
allocation based on your investment objectives, risk tolerance level, and investment time horizon.
Focus on the forest, not on the trees
As the market goes up and down, it's easy to become too focused on day-to-day returns. Instead, keep your eyes
on your long-term investing goals and your overall portfolio. Although only you can decide how much investment
risk you can handle, if you still have years to invest, don't overestimate the effect of short-term price fluctuations
on your portfolio.
Look before you leap
When the market goes down and investment losses pile up, you may be tempted to pull out of the stock market
altogether and look for less volatile investments. The small returns that typically accompany low-risk investments
may seem downright attractive when more risky investments are posting negative returns.
But before you leap into a different investment strategy, make sure you're doing it for the right reasons. How you
choose to invest your money should be consistent with your goals and time horizon.
For instance, putting a larger percentage of your investment dollars into vehicles that offer safety of principal and
liquidity (the opportunity to easily access your funds) may be the right strategy for you if your investment goals
are short-term (e.g., you'll need the money soon to buy a house) or if you're growing close to reaching a
long-term goal such as retirement. But if you still have years to invest, keep in mind that stocks have historically
outperformed stable value investments over time, although past performance is no guarantee of future results. If
you move most or all of your investment dollars into conservative investments, you've not only locked in any
losses you might have, but you've also sacrificed the potential for higher returns.
Look for the silver lining
A down market, like every cloud, has a silver lining. The silver lining of a down market is the opportunity you have
to buy shares of stock at lower prices.
One of the ways you can do this is by using dollar cost averaging. With dollar cost averaging, you don't try to"time the market" by buying shares at the moment when the price is lowest. In fact, you don't worry about price at all. Instead, you invest money at regular intervals over time. When the price is higher, your investment dollars buy
fewer shares of stock, but when the price is lower, the same dollar amount will buy you more shares. Although
dollar cost averaging can't guarantee you a profit or a loss, a regular fixed dollar investment may result in a lower
average price per share over time, assuming you invest through all types of markets.
Don't count your chickens before they hatch
As the market recovers from a down cycle, elation quickly sets in. If the upswing lasts long enough, it's easy to
believe that investing in the stock market is a sure thing. But, of course, it never is. As many investors have
learned the hard way, becoming overly optimistic about investing during the good times can be as detrimental as
worrying too much during the bad times. The right approach during all kinds of markets is to be realistic. Have a
plan, stick with it, and strike a comfortable balance between risk and return.
Don't stick your head in the sand
While focusing too much on short-term gains or losses is unwise, so is ignoring your investments. You should
check up on your portfolio at least once a year, more frequently if the market is particularly volatile or when there
have been significant changes in your life. You may need to rebalance your portfolio to bring it back in line with
your investment goals and risk tolerance. If you need help, a financial professional can help you decide which
investment options are right for you.
This information, developed by an independent third party, has been
obtained from sources considered to be reliable, but Raymond James
Financial Services, Inc. does not guarantee that the foregoing material is
accurate or complete. This information is not a complete summary or
statement of all available data necessary for making an investment
decision and does not constitute a recommendation. The information
contained in this report does not purport to be a complete description of the
securities, markets, or developments referred to in this material. This
information is not intended as a solicitation or an offer to buy or sell any
security referred to herein. Investments mentioned may not be suitable for
all investors. The material is general in nature. Past performance may not
be indicative of future results. Raymond James Financial Services,
Inc.does not provide advice on tax, legal or mortgage issues. These
matters should be discussed with the appropriate professional.
Securities and Investment Advisory Services offered through Raymond
James Financial Services, Inc., member FINRA/SIPC, an independent
broker/dealer, and are not insured by FDIC, NCUA or any other financial
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