Planning for market volatility: Tips on investment diversification and more

 

Market fluctuations are inevitable

An Ameriprise financial advisor can help you create a plan that may help weather market volatility. Your advisor can help you through questions many investors ask during uncertain markets including:

  • What’s behind the current market volatility, and how long is it expected to last?
  • How can I determine if my tolerance for risk has changed?
  • What actions should I be taking to protect my investments or adjust my asset allocation?
 

Markets don’t move in a linear fashion but instead move through periods of loss and gain. The gains you can realize over the long term — even through periods of market volatility — can be one of your greatest investment allies.

That doesn’t always make volatile markets easier to take. Emotions can often play a big role in investing decisions, especially during down markets.

The best strategy is to work with a financial advisor who can help you balance your goals and market conditions. The confidence you gain from knowing you have a game plan can help you take emotions out of the equation, make the most of market opportunities and protect your assets during periods of volatility.

Consider these four defensive moves that can help you invest with an eye toward volatile markets.

1. Let investment diversification help you.

Diversification is a simple yet powerful investment strategy to help reduce risk in your investment portfolio. Not only can you diversify across asset classes by purchasing stocks, bonds and cash alternatives, you can diversify within a single asset class. For example, when investing in stocks, you can choose to invest in unrelated companies, industries and regions. This helps reduce the risk from any one investment and shore up your portfolio against market volatility. If one investment performs poorly, it may be offset by another investment that performs better.

2. Consider your asset allocation.

Asset allocation is designed to help you create a balanced portfolio of investments. Your age, risk tolerance and investment goals are used to calculate what mix of stocks, bonds, cash and other assets are best for you.

Different types of assets carry different levels of risk and potential for return, and typically don't respond to market conditions in the same way at the same time. For instance, when the return of one asset type is declining, the return of another may be growing (though there are no guarantees). If you own a variety of assets, a downturn in a single holding won't necessarily spell disaster for your entire portfolio.

This has proven especially true in recent years as the mix of asset classes to choose from has continually become more varied. For instance, emerging market stocks and bonds, high-yield bonds, real estate investment trusts and master limited partnerships are now often part of a diversified portfolio.

Using asset allocation, you identify the asset classes that are appropriate for you and decide the percentage of your investment dollars that should be allocated to each class.

3. Re-confirm your risk tolerance.

Volatile markets naturally test investors. You may find that your stomach for risk has changed after going through recent market upheavals. That’s only natural, and it’s important to acknowledge your change in attitude so you can adjust your plan if needed.

At the same time, don’t overdo it. Keep in mind that you may need some growth-oriented investments in your portfolio to achieve your retirement planning goals.

To determine if your risk tolerance has changed, ask yourself these questions:

  • What are my investment goals?
  • Do you want aggressive growth?
  • Or, do I want to focus on avoiding losing money?

Find out where you stand. Take the Risk Tolerance quiz.

Your advisor can help you re-evaluate your risk profile and provide investment advice based on your individual situation and financial goals. Once you understand your risk tolerance, the two of you can adjust your portfolio.

4. Use a disciplined buying strategy.

Dollar-cost averaging can help. This tactic is designed to put market volatility to work for you over the long term. With this strategy, you invest a set amount at regular intervals to buy shares of a particular stock or fund over time. You buy more shares when the price is lower and fewer shares when the price is higher.

Over time, the average cost of your shares will usually be lower than the average price of those shares and you avoid the risks of trying to time the market. (See the table.) Although it’s tempting to buy stocks when the market is going up and sell when the market moves down, individual investors rarely get the timing right. With dollar-cost averaging, you can move closer to your long-term investment goals regardless of market highs or lows.

What dollar-cost averaging looks like

Monthly investment  Cost per share Shares purchased
$500 $25 20
$500 $20 25
$500 $10 50
$500 $20 25
$500 $25 20
Total: $2,500 Avg. cost/share = $17.85 140 total shares

If you have concerns during periods of market volatility, call your advisor. He or she knows you and the details of your portfolio best. Together, you can determine what, if any, action you need to take.