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Eight Simple Rules of Investing In Volatile Periods
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ShareIf you find yourself tempted to make emotionally-based investment decisions due to the difficulty of the last few months, you are about to make a dangerous mistake. These have been some trying days and months with the amount of volatility in the market, and in order to come out ahead, you will need to instill some discipline in your investing process. Here are some basic tenets to go by:
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Do the opposite of what your emotions are telling you. If the idea is to buy low and sell high, then buy when you want to sell (like right now) and sell when you want to buy (refer to 1999). The obvious factor is the issue of time. There is a different school of thought if you need these funds three months from now or in a longer-term time horizon. such as a matter of years.
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Separate your speculative assets from your conservative assets (i.e. your retirement portfolio).
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Don’t take additional risks today to make up for losses you incurred in the past. Let what’s done, be done and move forward with your investment strategy.
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Beware of the “hot new investment opportunity” bandwagon. Apply this caution to areas such as technology, real estate, commodities, and the next “bubble” stock. It is important to understand mean reversion!
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Your risk for holding cash is a negative real return when adjusted for inflation. Holding on to cash means you are losing purchasing power! There are truly no risk-free places to hold money.
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If you are not comfortable taking a position, then don’t do it. Don’t let you emotions lead you to do something contrary to a well formulated investment plan.
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In order to beat volatility in the market, you must have a longer time frame and dollar cost average into the market. By maintaining this mindset, you will be buying more at the lows and less at the highs. A fool proof way to be a contrarian!
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If you lack the discipline and/or time to develop proper portfolio management, then make sure to find a disciplined manager to manage your assets. Make sure to look for a manager that provides consistent returns and well adjusted risk management but is not constrained from holding cash, moving into any sector or holding large, mid, and small cap stocks.
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| Market Summary | May 24, 2012 08:58 am ET |
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