What to do in a Volatile Market
The NASDAQ dropped ~9%
The Dow dropped ~4%
Amazon shares dropped over 12%
With the volatility that we’ve seen since 2022 kicked off, it’s understandable that some investors have become nervous, and wondering how to respond to this volatility. When it comes to a decline and volatile times in stock markets, there are some simple strategies to follow, and some financial mistakes to avoid.
Having been through many market cycles with our clients over the years, we know that this time is never really different, and the same behaviours pay off in the long run. This week our team at Ally Wealth Management outlines the top do’s and do not do’s for market volatility.
- Avoid any panic selling
It’s natural that market volatility can make some investors nervous, particularly if you’re relatively new to investing, but often the worst mistake that you can make is to panic sell at the bottom, with the view that you’ll buy back into the market when it all settles down. Chances are, you’ll be buying back in at much higher prices. Instead, review your portfolio yourself or with your Financial Planner, ensure that you’re still comfortable with the long-term prospects of your holdings, and stay the course.
- Add to your portfolio
One of the best moves that you can make when markets have you worried, and we’ve seen a decline in the stock prices of quality companies is to add to your portfolio. If we link this to buying your favourite pair of jeans or a new watch, would you be happier buying the item at 10 or 20% below the current price..? Of course, you would. Unfortunately, many investors don’t apply this logic to the stock market and their investments.
If you’re already making monthly contributions, it may be time to review with your Financial Planner if you should look to increase this while markets are volatile, or even consider making ad-hoc contributions if your investments allow for this. Adding to your portfolio during a downturn can often pay off for you in the long run.
- Review your portfolio mix
During periods of market volatility, this can be a good time to review the overall mix of assets within your portfolio. This involves calculating how much exposure you have to each of the four key asset classes being; cash, fixed income or bonds, property and equities. Ensure that your overall mix is appropriate based on your risk profile and overall attitude towards market volatility. It’s also important to ensure that it’s suitable based on the time frame that you’re investing for.
This may also be an opportune time during periods of volatility to top up your exposure to growth assets while your equities exposure may have declined. It’s important to review this with your Adviser and ensure that your investments are appropriate for you.
- Don’t stop the regular contributions
If you have a regular investment plan that you’re contributing on a monthly, weekly or quarterly basis, it’s important during market downturns or periods of overall market volatility that you don’t hit the pause button just because you’re getting a little nervous. The major benefit of a dollar-cost averaging approach with investing on a regular basis is that it enables you to buy during periods of both market upticks and downturns, allowing you to add to your portfolio at cheaper prices.
As mentioned above, if anything this may be an opportune time to increase your regular contributions even if just for a short period of time. This way, the average cost of your investments may be able to be reduced potentially increasing your long term returns.
- When cheap isn’t really cheap
One of the common mistakes that many DIY investors make during a market downturn is buying stocks that they think are cheap, but are simply trading at a share price that is lower than their previous highs. For example, some of the unprofitable companies in the technology sector were trading on extraordinarily high valuations prior to the January market pullback, and despite having dropped up to 50% in their share price, are still trading at very lofty valuations.
This highlights the importance of doing your research and speaking with your Financial Planner about where the opportunities are during this current market pullback.
If you’re not quite sure about how to position yourself and take advantage of the current market volatility, reach out to our team at Ally Wealth Management for a complimentary discussion.
Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.
Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.
Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.
General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.
