By Steve Economopoulos, CFP, ChFC, CMT
To be a great investor, you must adjust your mindset and focus on what really matters during volatile times. Headlines will be great at causing fear and confusing a waffling investor. Although it may be difficult, it's best to avoid the hype. Here are some tips for how to invest when the market is volatile:
Corrections Are Normal
Instead of being afraid of the next decline, look forward to it. The market will drop 3-5% on a regular basis. The fear of it being a market crash each time is a futile attempt to time the market with your portfolio.
By always having cash on hand, you will be ready to be a buyer when others are a seller. (For more, see: 4 Behaviors That Sabotage Your Investment Goals.)
Have Cash on Hand
As stated above, having cash is the key to being a successful long-term investor. When the market is moving high beyond normal limits, it is still important to have cash on hand. This cash should be saved for investment, not for expenses.
There is always a buying opportunity in the market, you just have to find it. Having a process to find these next ideas will be your way of making money long term.
Be Aware of the Current Market Trend
It’s imperative to follow a few indicators to determine the current state of the market trend. Trend lines, along with support and resistance levels, are simple chart concepts that anyone can learn and can help avoid investing in an extended market.
When you follow certain asset classes that have been known to lead the market fluctuations (small caps, bond prices, the transport sector), you begin to glean information that could foretell the next market move.
Create a Strategy
Technical analysis provides fuel to suggest day trading to make money can work. However, the amount of time necessary to do so is beyond what most investors have available.
Create a strategy that you can buy partial positions and add more as you view strength in your new holding. Adding to weakness is often viewed as best but can be a dangerous proposition for a continuously falling investment. Often, investors may buy a good investment at a bad time. Your investment time frame can determine if it’s best to add more or cut losses.
Have Patience and Stick With Your Plan
Combining patience with a level of diligence to watch over your holdings on a regular basis often helps an investor get through a difficult market period. Patience does not mean “buy and hold” or “buy and forget.” It means you are mentally prepared to take the good with the bad and that accepting loss will be part of the game.
It also means that you follow a disciplined process that helps eliminate the emotion from your investment decisions. If you find yourself losing sleep or full of regret, then it’s time to consider if the money you are investing is truly part of a long-term investment plan or if it’s money you may need to spend in the near term.
If you have a few signs you follow, and you have a plan for your money, you should always have cash on hand to buy investments as the market moves lower. When the big decline does come, you should be prepared by raising cash to prevent large losses from hitting your respective holdings. The decline will eventually pass and you should have the funds on hand to accumulate good investments at lower prices. If you are able to do this, you will be investing wisely during volatile times and eventually benefit from it. (For more from this author, see: How to Protect Your Portfolio in a Volatile Market.)
Disclosure: Past performance may not be indicative of future results. No current or prospective client should assume that the future performance of any specific investment, investment strategy (including investments and/or investment strategies recommended by the adviser), will be equal to past performance levels. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's investment portfolio. The information presented herein is intended for educational purposes only, and is in no way intended to be interpreted as investment advice. In considering the information presented, readers should consult their own professional advisers, as there is no substitute for personalized investment or tax advice. Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Econ Wealth Management. Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach. Only your professional adviser should interpret this information.
This article was originally published on Investopedia.