You’ll want to get comfortable with volatility if you plan to invest in the stock market. Markets go up and down, and volatility can also vary greatly with the types of investments you select. It may help to look back at market performance of an index like the S&P 500®, which is a market-cap-weighted index that represents the average performance of a group of 500 large-capitalization stocks. Generally, bear markets—a decline of 20 percent or more—have been followed by a bull market recovery of at least 20 percent within a year.
Whatever happens with the market, there are steps you can take that may help to mitigate the effects of volatility.
Here are 3 ideas to consider:
Balance your portfolio by increasing the diversification of products and asset classes you include - which could help with downside protection and reduce risk during volatile market periods.
2. Don’t try to time the market
Timing the market or making decisions by attempting to predict the future is not a practical strategy. It is very risky, can result in high fees and potentially leads to lower long-term returns.
3. Keep buying even during volatile periods
Dollar-cost averaging is the strategy of investing a set amount of money in an investment on regular periodic intervals. It’s been a popular approach because it compels individuals to invest the same dollar amount on a consistent basis no matter what the market is doing. It also compels you to ignore market volatility and continue to participate actively in the market. Because dollar cost averaging involves continuous investing, investors should consider their long-term ability to continue to make purchases through periods of low price levels and varying economic periods.
Volatility will always be a part of the market, but there are options to help smooth out the bumps. Keep in mind, although these can help reduce the risk of investing, nothing can completely eliminate risks. These steps cannot guarantee a profit or protect against a loss in a declining market.
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