How to deal with market volatility
Canada Life - Oct 16, 2023
All investing includes risk, but there are ways to manage that risk. Creating an investment plan can help you manage your investment risk
Worried market volatility may impact your investment returns? It’s a common reaction. But it’s important not to let your emotions rule your decisions. An advisor can help you build a diversified investment plan to help reduce risk and help you reach your long-term goals.
What is investment risk management?
Investment risk management means identifying, evaluating and limiting the risk of losses when you invest.
Investment risk management 101
Know your risk tolerance
Understanding your risk tolerance is the first step in managing investment risk.
What keeps you up at night? Does the thought of losing money fill you with dread or do you view it as an opportunity to improve your returns by investing more while prices are lower? Knowing how comfortable you are with risk helps me pick the right investment for you.
Risk tolerance comes down to your psychological makeup and preferences and your financial situation. If you’re willing to take risk, but can’t recover from market drops, you could run into real challenges. I can help you determine your risk tolerance and investment personality.
Create an investment plan and stick to it
I can help you build an investment plan based on your investing goals and your risk tolerance. Once you have a plan, we can review it regularly and update it as your life and goals change.
When you encounter market volatility, remembering your goals and your plan to achieve them will help you stick to your plan and avoid making emotional investing decisions.
Focus on the long run
While volatility is part of normal and healthy market behaviour, dramatic moves can make you question your investment plan. However, when the market falls, history has shown it will typically come back—often stronger. Keeping focused on your long-term investment goals can help quiet media noise and help prevent you making choices that don’t follow your plans.
Asset allocation and diversification
Holding a variety of investments, or diversification, is a core technique for reducing risk. It can help if one of your investments falls in value because you’ll have other investments to potentially balance out your losses.
It’s also important to choose an asset allocation that makes sense for your financial situation and goals. Some factors include your age, what kind of returns you need and (when) and how much risk you can handle.
Investments with a potential for higher returns, such as stocks, typically involve greater risk. To create a portfolio with stable returns, you may also wish to invest in bonds, which are typically less volatile than stocks but offer less potential for high returns. As well, you can invest in other kinds of assets which may offer lower volatility alongside less return. I can help you diversify your investments and choose assets that reflect your risk tolerance and help you achieve your goals.
Strategies to help manage volatility and risk
There are several investment strategies you can use to help limit your investment risk.
With dollar-cost averaging, you invest the same amount of money on a regular basis, regardless of the price of the investment. Over time, investing this way can lower your average cost per unit compared to what you would have paid if you’d bought all your units at the same time when they may have been more expensive than the average.
Avoid following the herd
An example of herd behaviour is when some investors decide to sell based on bad economic news, and others follow. Soon there’s a big market correction because many investors are selling their shares. You’re often better off staying invested and waiting for prices to recover. Likewise, when stocks rise, following the herd can motivate investors to buy hyped and possibly overpriced investments.
Take advantage of market ups and downs
This is a strategy for experienced investors. If you understand a company, you can set a target share price. During a down market, you may be able to buy that stock while it’s effectively on sale. In a rising market, when the stock price is above your target, you can sell and take profit.
Remove emotion from your investment decisions
Investing can be an emotional experience. After all, you’re putting your hard-earned money in investments to meet your financial goals. Still, it’s important not to let emotions rule your investment strategy. Remember, even professionals don’t know for sure when prices will go up and down. Although markets dip, they usually recover—and you want to be there when they do. That’s why it’s important to develop a solid investment plan and stick to it over the long term.
Now that you know more about dealing with market volatility let’s meet.