One strategy does not fit all when fighting through a financial storm.
As an investor, it’s not easy to sit back and watch your investments lose value. It is even more difficult to want to add more to a portfolio during a downturn. However, the smartest mindset for an investor during a volatile market is to stay in and keep an eye toward the long-term payoff.
Being able to step back and take a “big picture” view begins with preparing to hold on to assets rather than liquidate them at a loss for short-term cash needs. It also means being willing to add to declining positions during drops and holding diverse investments. Each of these actions can help investors weather a financial downturn — and possibly end up with a stronger portfolio.
The first thing a forward-thinking investor should do is ensure that they have enough liquid assets to cover their expenses when the market is down. While it seems simple, booking a short-term loss and then buying back into the holding can have a serious implication on a portfolio. The worst and best days of the market tend to cluster together, so selling out shortly after a drop means investors could miss out on rebounds. Research published by JPMorgan found that investors who missed just the 10 best-performing days of the S&P 500 between the beginning of 1998 and the end of 2017 have earned less than half the return of someone who had stayed fully invested during that period.
Besides ensuring investors are in a position where they are not forced to liquidate during a down market, a powerful tool in the investor arsenal is dollar-cost averaging, or investing the same amount on a regular basis into a particular stock. In volatile or down markets, it means investors will have the opportunity to buy more shares at a better price and can help to cut the average price per share of holdings. While no strategy can guarantee upside, dollar-cost averaging is a great approach for investors with a long-term view to increase their holdings while increasing potential upside as well.
Diversification can also help to limit the impact of volatility in a given asset class on the overall portfolio. Investors have access to a variety of alternative investments that are not necessarily correlated to the performance of equities or bonds. Alternative investments include options like investing in real estate, commodities or even shipping. While investors can get access to some real estate exposure through the use of REITs, it tends to be focused on larger commercial holdings or mortgage-backed securities, and those REITs can be impacted by larger stock market volatility. Other options exist to allow investors access to alternatives, such as investing in residential fix-and-flip loans, investing in smaller commercial projects or even accessing ship construction investments.
The diversification benefit that access to these types of investments provides should not be underestimated. For example, a study done by the Federal Reserve Bank of San Francisco found that a portfolio of diversified single-family residences had better risk-adjusted returns than a portfolio of diversified equities. Investment providers can offer accredited investors access to a portfolio of high-yield, short-term residential real estate loans. As with all investment opportunities, no one strategy or investment is right for all investors. Investors should understand how an investment fits into their overall investing strategy and investment goals before investing.
With a potential trade war, more geopolitical tensions and worries about growth on the horizon, we’re likely to see market volatility increase in the coming year. Investors who think long-term can position themselves well to weather market swings. Having enough liquidity to stay invested during down or volatile markets can help to ensure investors cover all their bases and don’t miss out on good market days. Staying diversified can help protect investors against any one major asset or industry shock having an outsized impact on their portfolio. Finally, dollar-cost averaging can help investors increase their holdings while decreasing the average cost per share. Each of these tools can help investors focus on the long-term health of their portfolios. As with all investments, no one strategy fits all, and investors should consider their financial health, risk tolerance and investment needs before making investment decisions.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.