After one of the longest bull markets in history, many investors are worried about a stock market decline, and that is natural. Markets have cycles, and even if another financial crisis is not impending, even minor downturns can be troubling. But you can take steps to protect your portfolio from market volatility by following these three tips.
Review your asset allocation. Take a look at your asset allocation before you are tempted to make changes based on emotion. Make sure your portfolio is diversified. How much do you have invested in stocks, bonds, and cash? Is it still appropriate for your growth goals and risk tolerance? Although diversification can’t protect you from a loss, it may help cushion your overall portfolio from significant declines.
Invest a little at a time. If you are still contributing money to a retirement account, you may want to contribute a little at a time instead of all at once. This is called dollar-cost averaging, and it can help manage risk.
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 time, your average cost per share could be lower than the investment’s average price per share.
Hold steady. Some investors attempt to overcome market volatility by trying to time the market, jumping in on an upswing and jumping out on a downswing. But it’s difficult to predict how financial markets will react to any specific situation or event. You have to be right twice: when you sell and when you buy. So, stick it out.
Although past performance is no guarantee of future results, historically, the markets have always rebounded. From 1957 through the end of 2018, the S&P 500 Index has returned roughly 8%.