When financial markets fluctuate, even the calmest investors can start to question their financial strategies. But volatile markets can present opportunities, says Tracie McMillion, Head of Global Asset Allocation Strategy for Wells Fargo Investment Institute.
“Financial markets are frequently volatile—that’s their nature,” she says. “Over longer periods of time, that volatility can add up to attractive portfolio growth.”
McMillion compares it to seasickness: “If you stare at the waves directly ahead of you (the current financial market), the water may look bumpy and turbulent, and you might feel ill at ease. However, if you look outward at the horizon (your long-term investment goals), the ocean as a whole appears to be on a fairly even keel.”
Here are some strategies you can use to help weather economically turbulent times.
1. Match your investments to your timeline
The simplest way to feel more comfortable about your investments is think about your time horizon—in other words, when you’ll need the money.
For example, do you need some of your money fairly soon, or do you want it close at hand in case of an emergency? If so, McMillion says you should consider keeping your money in cash holdings and short-term bonds that can provide more income than cash holdings but are subject to fluctuating prices and the potential for loss.
On the other hand, if you are investing for a longer-term financial goal and won’t need your money for a number of years, McMillion recommends sticking to your long-term investment strategy. This includes maintaining a diversified portfolio of equities and bonds. Those investments carry more risks but also offer potentially better returns over the long term.
2. Know what to expect from your investments
Some investors lose confidence because they don’t fully understand how their investments work. If that’s the case, McMillion says learning more about typical asset behavior can help.
Consider educating yourself about investing. Once you know how your investments are likely to perform in certain financial markets, you can help ensure that your investment strategy is in line with your tolerance for risk.
3. Tune out the noise
McMillion describes the constant barrage of financial reports from the 24/7 news media as noise that can confuse investors about what they should do next.
“It’s common for the financial markets to temporarily get a little bit messy as they sort through the current news cycle,” she says.
However, investors usually don’t need to react to the everyday financial news, no matter how topsy-turvy things may seem.
“The U.S. news tends to report on a very small slice of available investments, particularly large U.S. company stocks,” she says. “Your portfolio, if it’s diversified as it should be, probably isn’t going up and down to the same degree as these stocks.”
There is always the potential for loss as well as gain. Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower rated bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses.
Wells Fargo Investment Institute, Inc., is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.