Tips for Investing in a Volatile Market

May 23, 2023

Why is it that when a consumer item like a new phone is on sale, we pounce, but when the stock market is on sale, we run? Rollercoaster markets tend to bring out the worst in investors. We tend to overreact to good news and bad news alike.

While it’s definitely scary investing in a volatile market (especially when we see terms like “recession” plastered all over the headlines), the truth is, sitting on the sidelines and waiting for conditions to be “perfect” is a far worse option.

So, let’s talk about how to handle market ups and downs. We’ll discuss some proven ways to approach investing in a volatile market, which is key for wealth builders everywhere. 

Volatility is Actually Quite Common

Market volatility is way more common than people think. Stocks go up and down daily, and there are a handful of big crashes and rallies throughout each year. Over time, the stock market is a wealth generating juggernaut, but the short-term ride can be bumpy. 

In fact, almost every single year since 1980 there’s been at least a -5% crash in stock market prices. Most years actually see a -10% correction or more! But most of these crashes are quickly followed by rallies of course, and the overall market usually ends UP at the end of year.

As long-term buy and hold investors, it’s important to keep a level head. Remember the saying “this too shall pass”… It’s true for both good times and bad times. Continuing to weather temporary storms and invest regardless of volatility is crucial to your wealth-building efforts.

Related: If you’re new-ish to investing, check out our beginners guide and learn the basics first. We cover which types of accounts to open, and how to start investing.

8 Tips for Investing in a Volatile Market

No doubt, investing while the market is experiencing volatility takes some guts. Here are some tips, strategies, and mindsets to help ease your anxieties when it comes to investing in a volatile market.

1. Have an investment plan (and follow it!)

Making decisions on the fly is one of the most common ways to lose money in the stock market. If you’re constantly reacting to news and events, you’re likely applying short term solutions to long term problems. It’s exhausting, and will yield below average returns.

Instead, make a plan (and write it down) so you’ve got something to refer to when markets are turbulent. Written plans make you more proactive (vs. reactive) which leads to feeling more in control and confident in uncertain times.

It’s important to know that investing plans don’t have to be terribly complex. Even a simple written goal such as “I will dollar cost average into a total stock market index fund via my workplace retirement account and Roth IRA every single paycheck no matter the market conditions” is sufficient. It gives specific instructions for you to follow when referring back later. When the market is in turmoil, your written plan will be your house.

Related: Check out this money mission statement worksheet. It’s full of questions that will help inspire money goals and investment plans.

2. Resist the urge to sell

Selling investments when the market is down not only locks in your losses, but it also prevents you from benefiting from the eventual recovery. Since every market dip has been followed by a recovery, there’s no real reason to believe that it won’t do so again. And honestly, if it doesn’t, we’ve got bigger fish to fry. 

When others start panic selling, take a step back and realize that market volatility is simply a byproduct  of the long-term investing process. The less you touch your investments, the better. Take a deep breath and stay the course. 

3. Continue investing (dollar-cost average)

Dollar-cost averaging (as mentioned above) is a great rule to have inside your investment plan!

What is “dollar-cost averaging,” you might ask? It’s basically when you invest a set dollar amount on a regular basis, regardless of share price. By spreading out your stock or fund purchases equally over time, you essentially “average out” the purchase price between high and low points. This semi-robotic form of investing takes a lot of the emotion out of the process – and that’s a good thing. 

Your 401(k) is a great example of dollar cost averaging. Every time you get a paycheck, a portion of that money is funneled into your 401(k) and invested, regardless of market prices. Applying this principle to your other investment accounts (IRAs, brokerage accounts, etc) is a great long term strategy. 

4. Think long term

I know, this is much easier said than done. But when you’re investing in a volatile market you can’t keep looking at the trees. You need to take a step back and see the entire forest!

Yes, it hurts watching your 401k drop 30% in value (as many folks experienced in early 2020). But, your retirement accounts aren’t needed, until… RETIREMENT! The funds inside them probably have decades to recover and grow.

Focusing on long-term performance can ease your anxieties. Here’s a great chart that illustrates the chances of losing money over years or decades of investing.

investing in a volatile market

5. Invest in low-cost index funds

Index funds are a fantastic way to diversify your portfolio, while increasing earnings and reducing risk. These funds are made up of stocks or bonds that track a market index, such as the S&P 500 or the Dow Jones Industrial Average.

With index funds you get to own hundreds of different assets without having to purchase them all separately. This leads to less volatility than owning individual stocks, which can swing wildly. The hot stock of the moment can quickly become yesterday’s news. 

Probably the best thing about index funds is that they are passively managed. This means a) cheaper fees since they don’t require professional managers or research teams, and b) there’s little-to-no human interference with investment options. Research has shown that professional fund managers rarely (actually it’s more like NEVER) beat the performance of their index benchmark.

All in all, index funds are amazing inventions. They allow you to get average market returns with little to no effort and should play a large part in your investment plan.

6. Consider rebalancing

Rebalancing is always important, but it’s especially important in a down market. That’s because volatility is usually what throws your allocation out of whack, and therefore your portfolio may have more risk.

For example, let’s say your portfolio has a mix of different funds including stocks, bonds, and REITs. And let’s say the stock market has swooned recently… This leaves you with a much higher exposure to the remaining bonds and REITs. Rebalancing and moving money from, for example, bonds to stocks would allow you to take more advantage of the recovery, getting back to your original balance faster.

7. Recheck your diversification/risk

Adding to the point above, it’s wise to regularly check in on the diversification of your investments along with reconsidering your risk tolerance. As time goes on, you get older, and your lifestyle changes, you’ll want to match your investments with your risk profile. 

As an investor, it’s up to you to decide how much risk you’re willing to take on. It should ease your mind to know that some of the broadest and most diversified index funds available also have the highest average returns over the long haul. But the closer you get to retirement, protecting the wealth you’ve been able to generate, de-risking your portfolio, starts to take precedence over chasing the highest possible return. 

8. Avoid the news and fight loss aversion  

During times of uncertainty you might want to limit your news consumption. The media is often fear-based in it’s approach. Gloom and doom headlines abound, which can lead to negative thoughts. Those downer vibes can cause us to react emotionally, which isn’t in our best interest. 

One of the reasons we have a harder time investing in a volatile market is because we’re scared of losing money. And the surest way to not lose money is to not put any at risk. But that isn’t a great solution either because there are no rewards without taking risks. Actually, the greater the risk, the greater the reward in many cases.

Keeping your cash under your mattress is a surefire way to make sure you don’t lose any of it. Well, kind of, but not really. 

Inflation steadily marches on, ensuring that the Benjamins you’ve stowed away will lose purchasing power each and every year. That’s why investing – whether in a volatile market or not – is so important. Savings alone won’t do the trick.

You don’t necessarily need to ignore all the news completely. It’s a good idea to be an informed citizen, right!? But still, don’t buy into the hype and allow the Debbie Downers to sway your investment decisions.

The Bottom Line 

Feelings of doubt are inevitable when the market is performing poorly. But when you’re questioning your decision to stay the course, let history be your guide. The overall American stock market has returned nearly 10% over the past 90 years. And those 90 years have included difficult events like wars, depressions, deflation, various subpar politicians, and…oh yeah, a global pandemic.

So while it might feel a lot safer to not invest at all, know that American capitalism has continued to produce results for decades on end despite these incredibly real challenges. Investing in an economic tailspin, although it feels a bit counterintuitive, is the best thing you could be doing over the long term.

Diversifying your portfolio, investing in low-cost index funds, rebalancing periodically, and having a plan are all important things to take in a turbulent stock market. Using these tactics can help you make informed judgments that will result in long-term success with your investments.

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Beer Notes…

While we discussed investing in a volatile market we enjoyed an Athena Paradiso by Creature Comforts! And as we’ve ramped up the podcast with an additional Friday episode every week, we could really use your help. Hit the share button, subscribe if you’re not already a regular, and give us a quick review in Apple Podcasts. Help us to spread the word to get more people doing smart things with their money in these difficult times!

Best friends out!

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