5 Investment Strategy Tips for Volatile Markets

How to prepare for the market's ups and downs.

by Michelle Crouch - December 12, 2016

When you’re heavily invested in the market and looking forward to retirement or other goals, volatility can be nerve-wracking. But it’s important to remember that periods of volatility can bring opportunities as well as risks. Having a strategic investment plan in place and using available resources to make informed decisions about your financial future may help you feel more confident during uncertain times.

Fortunately, in 2016, the market — despite what you may have read or heard — was relatively stable, with stocks performing well overall, says Sameer Samana, CFA, Global Quantitative Strategist at Wells Fargo Investment Institute (WFII). However, the steady year was punctuated by a few episodes of volatility, he notes: In February, for example, the market fell 14% as a result of concerns about China and the possibility of an additional Federal Reserve interest rate hike. And the market tumbled again in June briefly after the U.K. Brexit vote.

Based on its research and analysis, WFII predicts even more market fluctuations in coming years.

“From 2009 to 2014 or so, we were really insulated from volatility because any time the markets fell or economic growth slowed, central banks took action — the Fed would buy bonds, lower interest rates, etc.,” Samana says. “Now that we’re later in the economic cycle, we’re going to see a different policy. If you’re an investor, it’s time to change your assumptions about the market.”

Here are a few tips to keep in mind during times of volatility:

Stick to your plan

When the market gets choppy, investors often have an emotional reaction and want to pull out of the market to try to avoid loss, says Tracie McMillion, CFA, Head of Global Asset Allocation Strategy for WFII. Try to remember that moving or selling investments during a market decline will only lock in the loss; staying invested may allow you to benefit when the market comes back.

“Your plan should include an assessment of the amount of risk you feel like you can take within your portfolio,” she says. “Try to keep in mind that you have a cycle or two or more to ride through the volatility.” If you haven’t updated your plan in a while, set up a meeting with your Financial Advisor to discuss your goals and make sure you are still comfortable with the amount of risk you’re taking.

Consider your time horizon

If you’re going to need the money in a year or two to pay for college or a home purchase, don’t put it into the stock market. Short-term needs are where volatility can hurt you the most because you don’t have time to recover from any downturns. “If you can focus on the long term, that will give you a competitive advantage in a volatile market,” Samana says.

Having a strategic investment plan in place and using available resources to make informed decisions about your financial future may help you feel more confident during uncertain times.

Review your asset allocation

Even the most seasoned investors can’t get the markets right all the time; so it’s important to be diversified within your portfolio. “Having a diverse global allocation allows you to be exposed to areas of the market that might be doing well when other areas are particularly volatile,” McMillion says. “When equities have a spate of volatility, for example, that’s when bonds are likely to do better.” When you have a mix, a portion of your portfolio may be struggling, but it can be buoyed by another component. “That mutes some of the volatility. It’s a less emotional approach to investing, and it allows you to have a more consistent return pattern.” If your portfolio still leans heavily on U.S. stocks because they have done so well in recent years, this may be a good time to rebalance.

Make sure you have enough liquidity

If you are relying on your investments to generate income you need in the short term, make sure you have three to six months of living expenses in a savings account or similar safe haven so you can be flexible when markets are volatile. “You never want to be a forced seller during a drawdown. Therefore, you need some short, very liquid assets,” Samana says. “Some people have moved from cash to high-yield bonds in recent years because they’ve done so well. But they tend to act very much like an equity during drawdowns — so they may not be as safe as you think.”

Take advantage of opportunities

If you have time on your hands, market declines can be great opportunities to buy when prices are low. If you flip the price-to-earnings ratio of a stock upside down, that gives you what’s called earnings yield, Samana says. A high earnings yield can help you identify bargains. “If everyone else is running away, that’s when you can pick up stocks on sale,” Samana says. “Try to see lower asset prices as an opportunity.”

Michelle Crouch writes about consumer finance, parenting, and more from her home in Charlotte, North Carolina. Her work has appeared in Reader's Digest, Parents magazine, and The New York Times.

Image by iStock

Additional Resources

Concerned about individual equities? See how an index fund can help you track overall market performance.