Six Strategies for Weathering Market Volatility
By Saghir A. Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Whenever there’s market volatility, investors are naturally temped to take action. Unfortunately, the moves investors make can sometimes do more harm than good. Here are six strategies to help you make better choices when volatility strikes:
Instead of focusing on what’s happening this minute, you may consider the market’s historical performance and how volatility is generally part of a pattern the market has repeated on a fairly regular basis. Many serious financial crises historically have recuperated over the course of the market cycle. Investors who though long-term were eventually rewarded. Of course, past market performance is no guarantee of future results.
- Review your asset allocation
During the time of volatility, it’s often important to stick with your assets allocation to avoid making investment decisions based on emotions - typically fear. Your assets allocation should be designed to help you reach your desired return with a risk level you’re comfortable with. In defines what asset classes belong in your portfolio and in what proportion to each other based on where you are today, where you want to go, and how long you have to get there. Unless something has changed significantly in your life (a birth, death etc.) that may result in a need to change your goal and tolerance for risk, it may be advantageous to leave your allocation based on your investment objective.
- Use volatility to your advantage
If you’re saving for retirement, for example, and want to tapping your investments for a number of years, a downturn can actually help you work towards your goals if your dollar cost averaging a set amount in a particular investment or a regular basics ($100 per month, for example). In a fluctuating market, dollar cost averaging often less, you purchase additional shares when prices are low and fewer when prices increase. As a result money you invest when prices are low purchases more shares than it did before the market went down.”
- Stay focused on your goals
Never forget when you are investing, and stay focused on that. If those events are years away, a market downturn may not necessarily be a concern. Average market decline is relatively short-term event. Of course, there’s no guarantee that past performance will indicate future results. Having a longer time horizon usually means you can invest more aggressively because you may be able to ride out short-term price volatility and have the potential to enjoy the increased return a riskier investment may offer. If you haven’t addressed your asset allocation recently, you may need to make adjustments.
- Avoid trying to time the market
Investors wanting to time the market aim to sell their stocks when there’s a downtown, sit on the sideline until there’s a turnaround, and then get back to market. While this strategy may sound simple enough, in reality, it can be very difficult to execute successfully and could result in missing some of the market’s best days.
- Talk with a financial advisor
A financial advisor has a variety of tools available to analyze investors portfolio. He can examine how a portfolio is allocated to see whether it’s suitable for the investors to work towards their goals. The advisor can also provide additional information regarding the market’s historical performance and strategy that have helped many investors during market volatility. It’s during the period of market volatility that you need to know someone beside you on whom you can rely and who can help you navigate through stormy weather and life’s changes.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
