Dealing with market volatility

By Kevin Theissen

The start of this year has brought some market volatility that might have caused you some uneasiness. It might be difficult but remember that this is normal – especially after a year when the S&P 500 index ended up approximately 27% (and the last three years up 100%). It can be hard to stay calm when markets start to shift, but it’s a lot easier to make smart decisions if you have a plan.

First and foremost, you need to do your best to keep emotions out of it. It’s fine to feel anxious, but don’t let anxiety dictate your financial decisions. Emotional trading can lead to being reactionary rather than forward looking. The news media can lead to this anxiety. Staying on top of the latest news and trends is great but too much information can be a bad thing. This is especially true in market downturns, where it’s all too easy to be overcome by your emotions and make some badly timed trades. Nobody can predict the future, and in some cases, media influencers can have a vested interest to manipulate the markets in a given direction.

Another way of keeping your emotions at bay is to consider a fixed strategy like dollar-cost averaging. It’s the action of buying small amounts over regular intervals, for example every week or month no matter what the market is doing. If you believe an asset will eventually be worth more, dollar-cost averaging works whether markets are up or down as you’ll acquire more shares for your dollar during down cycles.

Next step is to set clear goals and remain diversified. No matter how confident you are in a particular holding, you should never invest too much in any one particular asset. Most astute investors choose to hold a variety of major asset classes long-term to diversify their portfolio. It’s very easy to get jittery while holding more volatile assets like Bitcoin and other digital assets but even these, if you hold them in reasonable amounts in your diversified portfolio, you’ll be able to remain calm and keep focus on the long-term.

Be very careful of trading too actively. It can be a very high-risk activity, and especially in a bear market, and you should set goals that balance minimizing potential losses with achieving potential gains. Most importantly you should trade within your limits. Also know that selling everything at once, called capitulation, can easily cause you to lose out if the market suddenly rebounds. Remember that if you hold on to a stock, and it goes down in value, you may have an “unrealized loss.” It’s not an actual loss until you sell. If the value of your stock has gone down since you bought them, they are only “realized” once you sell for less than your purchase price. And when it comes to taxation, know that holding an asset for one year or more (capital gain) will usually be more favorable than selling in the short-term (taxed at your ordinary income rate).

Most asset classes consistently move upwards over the long term. Even if prices are falling due to a market correction or bear market, history shows that prices are likely to eventually recover. Holding for long periods has been a proven strategy for long-term investors, which is looking ahead in years rather than months.

Again, remember that volatility is normal and even healthy for markets. Avoid reacting to short-term fluctuations and news and remain focused on your long-term plan.

Kevin Theissen is the owner of HWC Financial in Ludlow.