Periods of increased stock market volatility, when securities prices tend to sharply rise or fall within a relatively short period of time, make many investors understandably uncertain. Whether you are currently "in the market" or are considering entering, you've probably been wondering: "What's the best course of investment action to take during periods of unsettled market activity?"
Don't Overreact
It's somewhat of a cliché to say that two emotions-fear and greed-are the driving forces behind a good deal of stock market activity. During a bull market, as share prices rise, some investors develop a false sense of confidence regarding future price levels and believe that nothing short of catastrophe will stop the continuing upward trend. In their zeal, they erroneously project their short-term gains into an uncertain and long-term future.
On the other side of this coin lies the disappointment that may set in whenever market values start to drop within a relatively short period. During these bear markets, some investors overreact and begin imagining a loss of their nest eggs due to lower share prices. They may even begin selling their holdings in the fear that prices may fall even further.
It's important, however, for individual investors to view market volatility in its proper perspective. Swings in stock market prices, even those lasting a few months or years, generally should not be allowed to disrupt your long-term investment strategy. Why? It's simple. Historically speaking, long-term investing has tended to smooth out many of the fits and starts that can cause investors so much short-term discomfort.
Focus on Long-Term Objectives
Setting a middle course, one that avoids both bullish euphoria and bearish despair, can help individual investors keep their long-term financial objectives in sight. A focus on long-term objectives also helps avoid the temptation of trying to predict what the financial markets will do tomorrow, next week or next month. Long-term investors realize that even investment professionals cannot always accurately predict short-term market movements.
Adopting a long-term investment philosophy also helps guard against over-reacting to business stories that appear in the newspapers or other media. Regardless of whether such news is generally thought to be "good" or "bad," always consult with a financial advisor to evaluate the potential impact of these developments on your overall investment plan.
Review Your Strategy Periodically
Reviewing your financial strategy at least yearly is yet another way of helping you cope with market volatility. As you review, make sure your investment plan takes into account your age and investment timeline, as well as your financial resources and tolerance for risk.
At least for the foreseeable future, occasional spells of stock market volatility are probably unavoidable. However, following a long- term financial plan can help you to weather the storm.
