Investing in the stock market without being prepared for volatility is practically impossible unless you’re looking to have some unexpected losses along the way.
Whether you want to admit it or not, investing and volatility are two very connected terms, and there’s absolutely no way around it, except for not investing anything at all.
That being said, this doesn’t mean that you should avoid stocks like the plague, but rather, invest responsibly and with a thorough inspection of every asset you’re interested in, which will give you a better idea of the capabilities it may have.
Market uncertainty can cause panic for the most experienced of investors, but it isn’t unavoidable, and if you’ve entered an investment with the mindset that the potential volatility won’t hurt your portfolio too much, you’re eventually going to come out on top.
Take note of short-term market volatility and ensure that it won’t make a significant impact on your long-term goals.
Generally speaking, investors experience a financial loss at least 2 times as often as they actually make money on their investments, and it’s the good investments that they make which will keep them afloat.
However, it’s impossible not to feel a number of different emotions when a stock you’ve got a lot of money in plummets, which usually leads investors to make horrible decisions with their finances, at least the less experienced ones.
If you’re able to control your emotional state during periods of high volatility in the market you’ll always be able to avoid pointless panic and stay as disciplined as can be, allowing yourself to focus on your long-term goals instead.
At the end of the day, short-term losses are exactly that, and if you’ve properly arranged your portfolio, they’ll do little in terms of impacting your long-term investments.
Think about time in the market, not timing
Attempting to time the market is something that only the experienced investor should be doing, and even then it’s extremely risky business, as things tend to go south very easily.
If you’re just a small-time investor looking to make some extra money on the side, you should be focusing on the long term rather than trying to make a quick buck on an unsafe bet.
Time in the market is much more valuable than exposing yourself to immense amounts of risk by trying to time the market with a risky investment.
Coming back to the market only when it’s going through an upward trend is far less profitable than actually staying invested for longer periods of time.
Sitting on the sidelines can cost you a lot more than missing out on a good trading period, and you’ll want to remain dedicated to the market for as long as possible to guarantee higher returns.
Manage risk when it happens rather than avoiding it
Oftentimes, people misunderstand what “risk” means when it comes to investing, and while it’s very related to volatility, the two terms couldn’t be more different.
Risk refers to the potential loss you could experience if your investment flops, whereas volatility only refers to the return on an investment in relation to market fluctuations.
Focusing on these fluctuations is a perfectly normal thing, but you should always remember that permanent losses are far more damaging, so you’ll want to carefully balance your portfolio.
If you reduce exposure to riskier assets, you’re reducing the amount of money you could potentially lose, but this also means that your long-term purchasing power will be taking a hit, meaning that you could easily outlive all your savings at one point, putting you in a less-than-favorable position at the worst time possible.
It’s hard to overstate how important portfolio diversification is, as it’s one of the best ways to hedge against losses while also improving your exposure to some highly profitable assets on the market.
There isn’t a single asset class out there that’s consistently been at the top year after year, and it’s all very susceptible to change as the market fluctuates year in and year out.
If you shape your portfolio in a way that the investments you’ve got aren’t too connected to one another, you’re reducing the amount of risk you’re exposed to, meaning that if one of those assets begins to plummet, your losses will be insignificant due to your other assets performing normally.
A good way to instantly diversify is to invest in a stock index, which will immediately expose you to a number of the best-performing assets on the market while also keeping your investment in each of them low enough that your losses will be manageable.
By doing this, you’re making the most out of the market’s potential winners while also not losing as much as you usually would with a bad investment in an asset that looked promising at face value.