Volatile markets can inspire feelings of fear and anxiety among investors. Market surges and sags can occur for any number of reasons, including inflation fears, trade policy concerns, tax breaks, economic optimism, global events or a recession watch. When the stock market gets rocky, focusing on your overall financial picture, combined with sound planning, can pay dividends.
These five steps can help steady your pulse during market spikes and elevate your financial security:
1. Revisit your financial goals. Setting clear, prioritized goals–each with steps to achieve the goal, a price tag and a time frame–will help guide your investment approach. Good financial goals, tied to a sound long-term financial plan, typically will survive short-term market ups and downs and help you weather the impacts of inflation and other economic conditions.
2. Diversify your assets. A significant market movement can illuminate concentration risk, the risk of amplified losses that may occur from having a large portion of your holdings in a particular investment, asset class or market segment relative to your overall portfolio. It’s important to diversify across, and within, the major asset classes. Do you hold multiple asset classes (such as stocks, bonds and cash equivalents)? Are your stock holdings spread among different sectors (biotech, electronics, consumer staples and emerging markets, to name a few)? Is your bond portfolio diversified by issuer and type of bond (corporate, municipal and Treasury)?
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3. Focus on your future. Avoid impulse decisions when markets become volatile or economic conditions change. Instead, go back to Tip 1, and be aware that strategies such as dollar-cost averaging can help you stay focused on your future. Dollar-cost averaging involves investing your money in equal portions at regular intervals rather than all at once, or automating deposits to savings or investment accounts. This can reduce or remove emotion from decision-making and supports continued investing, even in times of rising inflation.
4. Understand the impact of changing interest rates. When stock markets are volatile, demand for fixed income products often rises, which in turn can drive up prices and depress yields. When interest rates eventually rise again, bond prices generally fall. But interest rate risk is one of a number of factors to consider when you invest in bonds and other fixed-income products, such as bond mutual funds or ETPs. For example, duration risk, which is the risk associated with the sensitivity of a bond’s price to a 1 percent change in interest rates, is another factor to keep in mind. Research the risks of …….