Some people worry about their investments even during ideal stock market conditions. This is part of human nature, but you shouldn't allow this fear to stop you from staying invested in the stock market during periods of volatility. No matter what your circumstances, or how much money you have to invest, knowing and understanding your investing personality can help when choosing investments to achieve long-term investing success and reduce your apprehension about market volatility.
Know Your Risk Tolerance
Even after taking into account recent volatility, investing in the stock market has historically shown to be a proven way to build wealth over time. Yet headlines tend to report more about volatility which often overshadows the good news about historical performance.
That said, we all have different levels of what amount of risk we can tolerate. As an example, if the stock market drops, is your first reaction to pull your money out? Or, do you think, "Great, now I can purchase more investments at a lower price." Or, you may keep a pragmatic attitude, knowing you can just ride out the storm, believing that the market will bounce back.
If you tend to be risk-averse, it's not a good strategy to take your money out and wait until circumstances appear calmer because selling low, buying high doesn't work. The answer lies in building a more conservative portfolio that aligns with your comfort level and investing timeline.
However, if you're more risk-tolerant, it probably makes good financial sense to take a more aggressive approach. Age also plays a factor. When you're younger, you can afford to be more aggressive, because you have a longer investment time horizon and can take advantage of compounding interest. But if you're closer to retirement, you may want to take a more conservative stance, because you'll be counting on those earnings to draw from in retirement.
Risks Versus Rewards
Diversifying your investments will help you manage the degree of risk in your portfolio. For instance, stocks have historically had the highest average returns among the three asset classes, but come with more risk, while bonds usually are less risky although the returns aren't as significant. Cash or cash equivalents such as share certificates, money market accounts or treasury bills while safe, usually offer the lowest long-term returns.
Instead of trying to choose individual assets classes on your own, an easier way to diversify is to invest using mutual funds, which are investment accounts professionally managed by experts who determine the mix of stocks and bonds based on the given investment objective of their funds. So you can choose stock and bond mutual funds to make up the bulk of your portfolio based on matching the investment objective of the funds to your individual risk tolerance, investment goals and time horizons.
Keep Calm, Stay Invested
The truth is, nobody can predict what the market will do next during turbulent times. What we do know is that jumping in and out of the market based on fear will most likely hurt your investing long term. No matter how old you are, meeting with a financial advisor can help you establishing short- and long-term goals, identify your investment personality and create a financial plan that adjusts as your circumstances change. A financial advisor can help.