6 strategies for when markets become volatile

If markets get choppy, it pays to have an investing plan and to stick to it.

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Key takeaways

  • Keep perspective: Political uncertainty is a constant, and downturns happen frequently. But market setbacks have typically been followed by recoveries.
  • Stay disciplined: Trying to time the market has proven challenging—and could cost you.
  • Plan for a variety of markets: An investing approach built with your goals and situation in mind may help you cope with short-term volatility.
  • Consider help: You may want to look at a professionally managed solution.

Triggers for market volatility can come in many different shapes and sizes—policy uncertainty in Washington or Beijing, earnings reports, geopolitical unrest. And market swings can rattle even seasoned investors' nerves. But volatility is part and parcel of investing. So put such uncertain times to good use as a motivator to help ensure your investment strategy aligns with your long-term goals, timeline and stomach for risk.

"Dramatic moves in the market may cause you to question your strategy and worry about your money," says Ann Dowd, CFP®, vice president at Fidelity Investments. "A natural reaction to that fear might be to reduce or eliminate any exposure to stocks, thinking it will stem further losses and calm your fears, but that may not make sense in the long run."

Instead of being worried by volatility, be prepared. A well-defined investing plan tailored to your goals and financial situation can help you be ready for the normal ups and downs of the market, and to take advantage of opportunities as they arise.

"Market volatility should be a reminder for you to review your investments regularly and make sure you consider an investing strategy with exposure to different areas of the markets—U.S. small and large caps, international stocks, investment-grade bonds—to help match the overall risk in your portfolio to your personality and goals," says Dowd.

Here's how.

1. Keep perspective—downturns are normal and normally short lived

Market downturns may be upsetting, but history shows that the U.S. stock market has been able to recover from declines and can still provide investors with positive long-term returns. In fact, over the past 35 years, the market has experienced an average drop of 14% from high to low during each calendar year, but still had a positive annual return more than 80% of the time.

In 2015 and 2016, this general pattern played out. U.S. stocks experienced sharp drops in August 2015, when China devalued its currency; in January 2016, as oil prices dropped; in June of 2016, after the "Brexit" vote; and in the run–up to the 2016 U.S. presidential election. Still, during the 2-year period, the market was up close to 8% cumulatively.

2. Be comfortable with your investments

If you are nervous when the market goes down, you may not be in the right investments. Your time horizon, goals, and tolerance for risk are key factors in helping to ensure that you have an investing strategy that works for you.

Even if your time horizon is long enough to warrant an aggressive portfolio, you have to be comfortable with the short-term ups and downs you'll encounter. If watching your balances fluctuate is too nerve-racking for you, think about reevaluating your investment mix to find one that feels right.

But be wary of being too conservative, especially if you have a long time horizon, because strategies that are more conservative may not provide the growth potential you need to achieve your goals. Set realistic expectations too. That way, it may be easier to stick with your long-term investing strategy.

3. Do not try to time the market

Attempting to move in and out of the market can be costly. Research studies from independent research firm Morningstar show that the decisions investors make about when to buy and sell funds cause those investors to perform worse than they would have had the investors simply bought and held the same funds.2

If you could avoid the bad days and invest during the good ones, it would be great—the problem is, it is impossible to consistently predict when those good and bad days will happen. And if you miss even a few of the best days, it can have a lingering effect on your portfolio.

4. Invest regularly, despite volatility

If you invest regularly over months, years, and decades, short-term downturns will not have much of an impact on your ultimate performance. Instead of trying to judge when to buy and sell based on market conditions, if you take a disciplined approach of making investments weekly, monthly, or quarterly, you will avoid the perils of market timing.

If you keep investing through downturns, it won’t guarantee gains or that you will never experience a loss, but when prices do fall you may actually benefit in the long run. When the market drops, the prices of investments fall and your regular contributions allow you to buy a larger number of shares.

In fact, what seemed like some of the worst times to get into the market turned out to be the best times. The best 5-year return in the U.S. stock market began in May 1932—in the midst of the Great Depression. The next best 5-year period began in July 1982, amid an economy in the midst of one of the worst recessions in the postwar period, featuring double-digit levels of unemployment and interest rates.

5. Take advantage of opportunities

There may be a few actions that you can take while the markets are down, to help put you in a better position for the long term. For instance, if you have investments you are looking to sell, a downturn may provide the opportunity for tax-loss harvesting—when you sell an investment and realize a loss. That could help your tax planning.

Additionally, if you execute a Roth conversion—moving money from a traditional IRA or 401(k) to a Roth account—a downturn could help. Compared with a conversion when asset prices were higher, a conversion in a downturn may result in a lower tax bill for the same number of shares.

Finally, if the movement of the markets has changed your mix of large-cap, small-cap, foreign, and domestic stocks, or your mix of stocks, bonds, and cash, you may want to rebalance to get back to your plan. That could provide a disciplined approach that helps you take advantage of lower prices.

These strategies are complex, and you may want to consult a professional before making any tax or investment decisions.

6. Consider a hands-off approach

To help ease the pressure of managing investments in a volatile market, you may want to consider an all-in-one fund or professionally managed account for your longer-term goals such as retirement. These different approaches offer a range of different services and different costs but, depending on the specific option, may provide professional asset allocation, investment management, and ongoing tax management.

The bottom line

Rather than focusing on the turbulence, wondering whether you need to do something now or wondering what the market will do tomorrow, it makes more sense to focus on developing and maintaining a sound investing plan. A good plan will help you ride out the peaks and valleys of the market and may help you achieve your financial goals.

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