Life is filled with unknown challenges and the stock market is no different. Just like it’s important to have a plan in life before milestones such as buying a home, planning ahead for swings in the market is important, too.
Corrections and volatility in the market can be accompanied by feelings of fear or uncertainty because no one likes to see their account lose value… even from record gains, but corrections are usually a sign of a healthy market.
So, how common are market swings? Well, the S&P 500 index flatulates often and can be made up of both bull markets – meaning that the S&P 500 tends to be positive trending, and a bear market – meaning that prices are falling.
Anticipating market selloffs is complicated and can be stressful and “timing the market” needs to be resisted. Many consumers end up causing greater losses to their portfolio when they try to participate in the ups and downs of the market. That’s why I often remind my clients that it’s more about “time in the market” and not “timing the market.”
So, how can you prepare for Market Swings? First, you must understand your own risk tolerance. The more risk you take on the higher chances there are for substantial gains and losses. Working with a Financial planner can help you determine this risk tolerance! As you near retirement, it is important that you understand how much of your portfolio is at risk.
Second, you can to some extent control the magnitude of the negative returns by selecting a mix of investments that have either more potential for upside or less potential for high returns and also less risk—a process called diversification. The magnitude of market corrections will often not be as severe by carefully selecting a mix of investments. Remember when selecting investments, the more conservative you are the less likely for higher gains. But you’re also limiting your losses.
Third, mixing your investments – a process called allocation – can be critical in preparing for swings. Keeping your portfolio balanced is important for both growth and stability. Working with a financial professional to create a tailored portfolio can put you in better position to potentially limit your losses and be prepared for an ever-changing market.