A healthy number of the investing world’s greatest maxims relate to the virtues of keeping a cool head in turbulent or uncertain times. There’s Shelby Cullom Davis’ value-investing mantra, “You make most of your money during a bear market; you just don't know it at the time,” and Warren Buffett’s all-season exhortation to “Be greedy when others are fearful, be fearful when others are greedy.” I’m partial to the lazy investor’s credo: “Don’t just do something, stand there!,” which has applications for investing as well as other parts of life.
But such wisdom can ring a little a little hollow in truly uncertain times like the current environment. Every bout of volatility is different, and most of today’s investors remember all too well the market slide during the financial crisis, when stocks shed roughly 50% of their value between October 2007 and March 2009. What if the current market volatility is the start of something really bad like that?
Further complicating the task of dispensing all-season, all-purpose investing advice is that investors themselves are all different. Those closing in on retirement who haven’t looked at their allocations recently may well want to use the current volatility as a wake-up call to lighten up on stocks, despite the frequent admonition to do nothing when stocks are down. Younger investors, meanwhile, should stay the course with the most aggressive equity allocations they can stand, and may even use the sell-off as an opportunity to add to downtrodden stocks.
As the current volatility unfolds, here are some ways to ensure that your portfolio doesn’t go off track.
Don't 'Go Big'
Seeing your hard-won portfolio sink isn't pleasant. But at the risk of stating the obvious, it's unwise to retreat to cash with the whole of your portfolio. True, you may buy yourself some short-term solace if the markets continue to be chaotic, but that sense of peace could prove short-lived when stocks recover. When that happens, what had been a sense of calm is usually replaced with the nagging worry about when to get back in, and that can be awfully hard to gauge.
Using the market sell-off as an impetus to scoop up bargains makes more sense, but there's no reason to be anything but deliberate about it. After all, there's no telling whether the election-related uncertainty—and subsequent market volatility--will mark the nadir for stocks in the near term. With stocks not particularly cheap coming into the current turbulence, it’s possible that additional—and better--buying opportunities will present themselves in the months or years ahead. Do your homework, pick your spots, and put the money to work over a period of weeks rather than all in one go. Alternatively, you could reasonably delegate the bargain-hunting to a good value-conscious mutual fund or ETF.
Let Your Time Horizon Determine Next Steps
As you gauge whether to make any changes in light of the volatility, the really important concept to keep on your radar is risk capacity--what sort of losses can you endure without having to rework a goal?