How to navigate market volatility

Even though market volatility is a normal part of investing, it can be difficult to navigate, even for the most experienced investors. However, history shows that the market is ultimately resilient and those who stay invested over the long term are often rewarded.

During challenging conditions, we are here to help keep you on course and address any concerns you may have. Here’s a look at several time-tested investment strategies for navigating market volatility.

Prepare for market volatility

While market volatility can be difficult to predict, there are actions you can take to prepare:

• Create a personalized investment strategy. One way to help reduce the long-term impact of volatility in your portfolio’s value is to create an asset allocation and diversification strategy based on your specific situation, where your goals, risk tolerance, tax situation and time horizon are considered. By creating a personalized strategy, you’ll be better prepared for market downtowns and feel more confident during the inevitable bouts of market volatility.
• Regularly rebalance your portfolio. If left unattended, a portfolio’s asset allocation may evolve to a different risk profile than you planned for. You might find your portfolio is weighted too heavily with stocks, for example, or too conservatively with too many bonds. When you regularly rebalance your portfolio, you can bring your investments into alignment with your long-term strategy and risk tolerance, giving you more confidence to weather periods of volatility.
• Remove emotion from investing with dollar-cost averaging. Dollar-cost averaging is an investment approach where you invest the same amount in the same vehicles on a fixed schedule — regardless of market movements. Continuing to invest in the market when it’s going through a downturn ultimately results in buying shares at a discount, a lower price per share. Over the long term, this strategy can potentially lower your average cost per share and reduce the risks that come with trying to time the market. Knowing this may help prevent you from making emotional decisions.
• Maintain an adequate cash reserve. A cash reserve is money you have on hand to pay for unexpected events or emergencies. How much you should have in a cash reserve will depend on your personal situation, but in general, it’s smart to keep three to six months of living expenses in an easily liquid account. During times of uncertainty, a cash reserve can help you feel more secure, better equipping you to wait out the volatility and avoid having to sell assets in a down market.

Manage your portfolio during market volatility  

When a market downturn does eventually arrive, it’s normal to find yourself with doubts. Here are a few ways you can stay on track — and potentially take advantage of the environment:

• Trust your personalized financial strategy. Aligning your financial strategy to your unique goals, needs and preferences — and remaining invested whether the market is up or down — is a time-tested way to build wealth over the long term.
• Continue investing or increase your systematic investment contributions. If you have extra money to invest, market downturns can be an advantageous time to increase your regular contributions, as share prices will often be lower.
• Avoid large distributions or withdrawals. While you may be tempted to make withdrawals or take distributions during downturns, doing so may turn a temporary loss into a permanent one.
• Take advantage of tax-loss harvesting. Tax-loss harvesting is one way to use the tax code to help reduce the sting of an investment loss. When executed properly, this strategy can allow you to manage and reduce your tax burden by selling investments at a loss to offset the taxes owed on the capital gains from other investments.
• Be patient. While easier said than done, practicing patience is key to successful long-term investing. When markets are volatile, it’s helpful to focus more on what you can control, such as how much you save and spend, and to remember that all downturns have one thing in common: they eventually end.

Learn more: Retiring in a down market