personal finance | may 14, 2020
What to Do When Markets Are Volatile
Three ways to adopt a more thoughtful and measured approach to changing market conditions.
Judith Ward, CFP®
Senior Financial Planner
Recognize short-term trends for what they are and focus instead on the long term.
Maintain a well-diversified portfolio to help manage risk without jeopardizing potential returns.
Automate investment contributions to avoid making emotional investment decisions.
Stay the Course
I'm Judith Ward, CFP®, a senior financial planner and a vice president at T. Rowe Price.
Extreme, or sharp, market volatility can be very distressing. However, making rash decisions based on short-term fluctuations could impact the long-term growth potential of your investments.
So how can you take a more measured approach rather than having an emotional response to market changes? There are three steps to follow when managing your investments.
Focus on the long term,
Diversify your portfolio, and
Consider automating your investment strategy.
Even with an appropriate allocation, it can be challenging to overcome your anxiety when markets decline. By focusing on the long term, you can put short-term events into context. Keep in mind, the S&P 500 Index has never lost ground in any rolling 15-calendar year period since 1926. Of course, past performance cannot guarantee future results.
Next, look at your portfolio diversification. Diversification—investing in several to potentially thousands of companies, as you do when you invest in a mutual fund—also may help reduce volatility by muting the impact of any single investment. Remember that diversification cannot assure profit or protect against loss in a declining market.
Finally, to avoid being overly influenced by emotion, try reducing the number of decisions you make. Consider automating your contribution amounts, the timing of your contributions, and even the increases in your contributions. And as tempting as it might be—don't look. Don't check your balances every day, that just adds to your anxiety and takes the focus away from your long-term goals.
In short, when managing your investments, look beyond the volatility of the moment and focus instead on adhering to your long-term strategy. Continue to save and invest, and maintain an investment mix that is appropriate for your time horizon. These are the variables you can control, and they are the most likely to determine whether you succeed at reaching your investment goals.
And remember: if you have any questions, we are here to help.
This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.
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