Ways Investors Deal with Market Volatility
Markets are moody. So, how do investors deal with market volatility? It varies depending on skill, theory, and experience.
If you're just beginning to invest in the stock market, you have a lot to learn.
You have to learn what is an ETF for, how to use support and resistance in trading, and what are the most dangerous investments you can make. Thankfully, you can learn most of these through reading articles, going to classes, or asking experienced traders what to do.
Some aspects of investing, though, aren't so easy to learn. They only come with experience—and at times, you will end up failing. One of the hardest things to learn is how to deal with market volatility.
Fluctuations in the market are scary, and there are many different ways investors cope with it. Today, we're going to take a look at some of the many ways you can handle the market volatility of today... and which offer the best rewards.
One of the most common ways total novices deal with market volatility is to sell off any investments that rapidly dipped in price. This is the worst way to deal with market fluctuations, primarily because you're buying high and selling low.
Generally speaking, any other strategy would be better than this one. Don't panic sell, no matter how rough it gets.
Limit orders are a great way to deal with market volatility that goes in an upward direction. When you set a limit order, you're telling your broker to sell your shares once they hit a certain (higher) price or better.
This allows you to have a more profitable trading day, even if you aren't glued to the stock ticker. Most of the best day trading apps, as well as some investing apps for beginners, will have limit orders.
Ignore the volatility and continue buying stocks as regular.
This strategy is also known as dollar-cost averaging, and while it may seem counterintuitive, it's a one of the best ways to handle a recession, a bear market, or really deal with market volatility of any kind.
The idea behind this strategy is that keeping a steady pace will allow your losses to be averaged lower. When the market rises upwards, your gains will be more pronounced and you will recover most if not all of your loss.
If you're looking to deal with market volatility that really seems like it'll be painful to your wallet, you may want to impose stop-loss orders. Stop-loss orders are exactly what they sound like. They are orders that are designed to keep your losses to a minimum in the event of a major crash.
These are orders that only execute is stock reaches below a price that you name. Most traders use these orders as an "in case of emergency" way to deal with sudden stock crashes. However, they can also help you deal with shaky markets that make you nervous.
Not all exchanges will actually accept these, but it's worth a try.
Hold onto your investments, but don't buy any more risky ones for the time being.
Another way to deal with market volatility would be to hold onto the investments you already have, but not invest further into them. Rather, people who choose this route will go for safe, low-risk investments while they wait for the fluctuations to blow over.
The rationale here is that time will improve the returns of the plunging stocks, but that it's better to stick to "tried and true" in the meanwhile. By choosing safer bets like bonds, they will see some returns—even when the markets are bearish.
Warren Buffett is one of the top billionaires in the world, and his strategy to deal with market volatility is pretty simple. All he does is buy stocks from great companies and let them sit, confident that the market volatility will serve him well in the long term.
The big difference with Buffett's strategy when compared to regular dollar-cost averaging is the fact that he doesn't necessarily average his losses. Rather, he views it as a bargain buy because it's a company that he believes is undervalued.
In time, the company's value will show itself—and that's when the real profits roll in.
Sell your investments in portions, and re-invest in something safer.
Sometimes, as hard as you try, you won't be able to deal with market volatility. Whether it's because it's too stressful, or you're just not really ready to handle that kind of loss, it happens and you shouldn't feel bad about it.
Making a graceful exit is a smart move here. You can do this by selling your investments in chunks, rather than all at the same time. Then, slowly move your investment money into safer bets like bonds, tax liens, and other similarly stable goods.
Let's say that you tried to deal with market volatility as best you could, but things still didn't play out as well as you had hoped. These things can and do happen, but no one wants to happen to them.
If you lose all your money for one reason or another, then the best way you can cope is to take it as a learning experience. What did you do wrong? What went right? It's up to you to figure that out and learn from the mistakes you made.
Lower the percentage of high risk investors in your portfolio, but keep the rest of your stocks the same.
People who have a hard time learning how to deal with market volatility would be wise to consider lowering the percentage of high-risk investments they keep in their portfolio.
While they *could* pay off, keeping your investments relatively conservative may be the best way for you to cope. This is particularly true with emotional investors.
The best way to deal with market volatility, in most cases, is not to freak out about it. Stocks go up and down all the time. There's always going to be a little bit of fluctuation as people buy and sell stocks.
As long as you are alive, you can find a way to reach your investment goal and recovery you're money. So, mellow out. You'll be alright as long as you think of the grand scheme of things.