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Don't Let Short- Term Volatility Affect your long term view
An Editorial By Alex Gallego AAMS
The market rarely proceeds in a straight line. Instead, it has its ups and downs. Rather than react emotionally to unpredictable market dips and jumps, it's a good idea to prepare your portfolio and your frame of mind to withstand potential turbulence. Investors are benefiting from the longest running bull market in history. As a result, some people may have unrealistic expectations for the performance of their portfolio. The reality is that market volatility is not unusual.
Staying Focused Many people become nervous about market declines. However, it's important to recognize that emotional reactions to short-term market movements can derail your long-term investment plan. In a volatile or declining market, your best defense is to stay focused on your investment goals. Take a Long-Term View; When the financial markets experience a significant upward or downward spike, it tends to make headlines, and everyone seems to want to liquidate their holdings. Remember, your investment strategy should be shaped by your long-term objectives and not by short-term market movements.
Think Before You Act Some investors equate a market drop with an actual dollar loss. However, until you actually sell your holdings, any drop in share price is a loss on paper only. You don't realize the profit or loss until you actually sell the security. In addition, when you sell shares with a profit you may incur capital gains, which will be taxed as short- or long-term gains.
Time in the Market Your investment time frame will of course vary according to your goals. But if you're investing for more than five years, short-term market fluctuations will have less impact on your portfolio. In fact, the longer you remain invested, the more likely youÕll be able to withstand periods of market dips. Some investors try to time the market, jumping in and out based on possible market movements. Unfortunately, this usually requires more luck than skill. Historically, staying fully invested in the market even through some of the worst market sell-offs has paid off.
Stay on Course In addition to investing for the long-term, the following are some basic investment strategies that can protect your portfolio from volatility.
Diversify One of the best ways to offset the risk of stock market fluctuations is to diversify. Consider balancing your stock investments with recommended securities within different sectors. This principle of diversification also applies within single asset classes. For example, you can diversify your stock portfolio with international investments, small-cap and large-cap investments.
Invest on a Regular Schedule Dollarcost averaging is a technique that gets rid of investment guesswork. By investing a consistent amount on a regular basis, $100 a month for example, you avoid timing the market. Your $100 will buy more shares when prices are low and fewer shares when prices are higher. While a program of regular investing does not guarantee a profit or protect against loss in declining markets, it can help build discipline and relieve you from decisions about when to buy more shares. Before enrolling in an automatic investment program, you should evaluate your willingness and ability to continue investing through periods of market decline.
Above all, it is important to review your portfolio on a regular basis with your financial consultant to ensure that your holdings are in line with your goals. If there is one safe prediction about investing, it is that the future will bring unwanted results, as well as gratifying results. These swings need not derail your plans if you adhere to a carefully selected investment program based on your personal situation and needs, rather than on the ever-changing moods of the financial markets. If you have any questions or would like to discuss how market volatility could affect your portfolio, contact me:
Alex Gallego AAMS First Vice President Ryan Beck & Co. 516-719-7660 alex.gallego@ryanbeck.com www.alexgallegogroup.com
