Steps to Handle Market Volatility
1 - Assess Asset Allocation and Risk
The amount of volatility in an account is determined by two key factors: 1) the amount of risk one has in their portfolio and 2) by the amount of money one has in stocks and long maturity bonds versus cash and short maturity bonds. Over the last several years stocks and long maturity bonds have performed very well, this may have caused an overweight in your portfolio towards the riskier side. By rebalancing into cash and short term bonds one can reduce their portfolio’s volatility and lower the risk.
2 - Review Your Risk Profile
It is prudent as we continue to age to review one's risk profile from time to time with your Investment Advisor to ensure your situation and risk are inline with your current lifestyle and financial situation. Talk to your Investment Advisor if changes are needed to be made.
3 - Invest for Short Term Expenditures
If you need money for an upcoming purchase in the next 2 years, the funds for this should be in cash and short term bonds regardless of the interest rate and regardless of what the markets are doing.
4 - Invest for a Minimum of Three Years of Income Payments
If you are retired and supplement your monthly living expenses with your investments, then the required funds for each year should be invested in cash and short maturity bonds regardless of the interest rate.
5 - Review Weak Positions in Your Portfolio
Review the investments in your portfolio that have done poorly and move to a better opportunity where appropriate. Discuss with your advisor and take tax losses where appropriate. Don’t be afraid to “weed the garden”.
6 - Increase Equity Exposure
If you are overweight in cash and short term bonds, use the stock market decline as an opportunity to add stocks to your portfolio according to your risk profile. Since market timing can always be an issue, you may want to divide planned purchases equally into three purchases spread over three-six months. This use of dollar cost averaging increases the likelihood of investing at a great price.
7 - Take a Break
If you have done everything listed above and the market continues to fall, take a break from looking at the markets for a month or so; knowing that you have done all that you can do to mange your financial situation for the time being. These things take time to work themselves out.