As a result of the stock market’s decline during the financial crisis, many investors now worry that even minor downturns are warnings of worse times ahead.
No one can predict when or by how much a security’s value will fluctuate, but you can take steps to protect your portfolio from market volatility.
First, don’t try to time the market. Some investors try to overcome market volatility by jumping in on an upswing and jumping out on a downswing. But even the pros find it difficult – if not impossible – to predict how financial markets will react.
Remember, you have to be right twice: when you sell and when you buy.
Review your asset allocation before you’re tempted to make emotional changes.
Make sure your portfolio is diversified. Although diversification can’t protect you from a loss, it may help cushion your overall portfolio from significant declines.
If you’re still contributing to an account, you may want to invest a fixed amount a little at a time instead of a lump sum all at once.
This strategy for managing risk is called dollar cost averaging.
Because the amount you invest remains constant, you are able to buy more shares of a stock or mutual fund when the price is low and fewer shares as the price rises. Over the entire purchase period, your average cost per share could be lower than the investment’s average price per share.
Stick it out. Although past performance is no guarantee of future results, historically the markets have always rebounded. For the past 10 years ending December 31, 2011, the S&P 500 index gained over the long term, returning 2.92%.
(Note that the S&P 500’s return factors in dividends and is thus higher than it would be without dividends. It is not possible to invest in an index.)