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Tips to Cope with Market Volatility

 

With respect to investments, the word “volatility” refers to sharp up and down movements in prices. Below are several tips for Extension educators to share with clients to help them cope with market volatility:

  1. Avoid Emotional Decisions. Volatility is a normal part of investing and is to be expected. The worst thing that someone can do is “panic sell,” thereby locking in a loss. Automatically investing every month in up and down markets (e.g., TSP contributions) is one of the easiest ways to mitigate the risk of emotional investing.
  2. Stay the Course. Being nervous during market downturns is normal, especially for inexperienced investors. Instead of worrying about market performance, which cannot be controlled, investors should focus on controllable things such as household spending and investment expenses.
  3. Avoid the Urge to Micromanage.  Constantly watching market performance can lead to irrational action. Bad days in the market are emotionally draining. Looking at stock prices daily also makes it much more challenging to maintain a long-term perspective.
  4. Maintain Perspective. Historical performance data can help calm frayed nerves and remind clients that investing requires a long-term time horizon. There has never been any 20-year rolling time period between 1926 and 2020 when the stock market has lost value.
  5. Don’t Time the Market. Investors should stick with an investment strategy in up and down markets. Catching high and low prices (i.e., market timing) is generally futile because investors have to be right twice (i.e., when to get out and back into stocks) and often miss the best trading days.
  6. Diversify Across Asset Classes. Selecting investments from different asset classes (e.g., stocks, bonds, cash equivalents, real estate) will not necessarily keep someone’s account from losing value in a down market, but it can help to mitigate losses. A well-diversified portfolio should be a key part of everyone’s investment strategy.
  7. Rebalance as Needed. By rebalancing, investors return to target asset class weights (e.g., 60% stock, 30% bonds, 10% cash) that shift with market volatility, keeping risk levels consistent. Rebalancing can be done by selling securities in over-weighted assets or placing new deposits in underweighted assets.
  8. Understand Investment Risks. There is no guarantee of anything in investing and past performance does not predict future results. Understanding and accepting investment risks (e.g., market risk, business risk, interest rate risk) is essential to avoid making costly future mistakes.

Remember that investing is a long-term proposition. Patience is an important factor in investment success.

For additional content related to working with clients on personal financial issues, visit the OneOp Personal Finance Team. Free CEUs are available for AFCs and CPFCs through our webinars.

Written By:
Barbara O'Neill

Edited By:
Selena Garrison
Program Coordinator

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This technology is supported in part by New Technologies for Ag Extension (funding opportunity no. USDA-NIFA-OP-010186), grant no. 2023-41595-41325 from the USDA National Institute of Food and Agriculture. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or the Extension Foundation. For more information, please visit extension.org. You can view the terms of useat extension.org/terms.

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