Financial Freedom, Market Volatility, and You
If recent market volatility has you questioning your opportunities for financial freedom, you are not alone. Due to rising inflation, higher interest rates, a volatile stock market, and recession fears, many investors find themselves wondering how to proceed.
Fortunately, history may help gain perspective on this market. Those who weather volatility might have more resilience. Here are some tips and tricks to help you deal with market volatility and assess the quality of your current investments.
Your Emotions are Real, Just Not Valid as Investment Guidance
Behavioral science research shows that most people left to their own devices are below-average investors.1 The reason for this is that it is easy to make poor decisions based on emotion, such as:
- Selling a stock that has dropped in value, only to see its value rise afterward.
- Sitting out of the market entirely during a recession and then beginning to invest again only after asset values rise, missing the chance to invest during the lows.
- Using the “you only live once” (YOLO) 2 strategy to invest (gamble) everything in the new hot penny stock or cryptocurrency.
But while it is natural to experience strong emotions during volatile times, acting on them is another matter. Unless you have insider knowledge about a particular stock or company (and trading on that knowledge is illegal), the market has already reacted when you hear the news that tempts you to change your investment strategy. In other words, it is almost impossible to time the market.
If You are Happy With Your Investment Plan, Sit Tight
If you avoid the temptation to tweak your investments when asset values rise, adjusting them during a market downturn may not be a good idea. However, market volatility may sometimes reveal weaknesses in an investment plan or suggest a different asset allocation. Working with a financial professional to outline your risk tolerance, desired asset allocation, and investment timeline to create a managed portfolio for both bull and bear markets might be helpful.
Ultimately, it can help if you have a portfolio that allows you to sleep at night, no matter what the market is doing. For some, this may mean holding a substantial cash balance. For others, this may mean investing in index funds instead of picking stocks. Whatever approach you select should help you mitigate investment anxiety and allow you to hold on for the long term. By being proactive and planning your investments before you face a crisis, you may better manage reactive decisions that might harm your portfolio in the long run.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. All indexes are unmanaged and cannot be invested into directly.
Asset allocation does not ensure a profit or protect against a loss.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. This article was prepared by WriterAccess.
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Footnotes
1 What FAs need to know about behavioral science in finance https://www.bcgbenefits.com/blog/behavioral-science
2 From YOLO to diamond hands, here are 9 pieces of lingo you need to learn before diving into Wall Street Bets https://markets.businessinsider.com/news/stocks/reddit-wall-street-bets-lingo-guide-glossary-yolo-diamond-hands-2021-5-103045077
