But just because there will be times of uncertainty doesn’t mean you should skip putting your money in the market. Investing is a critical piece of your financial life.
The key is to focus on controlling your behaviour in relation to market volatility, and making sure you’re only exposed to the volatility you can handle.
So let’s take a look at the five ways to weather the swings of the market once you’ve invested in it.
1. Invest in a diversified portfolio
The easiest requirement when it comes to handling volatility in the market is to put most of your money into a broad, diversified portfolio of different investments.
This is easy to do with robo-advisers, which handle all the complexity for you: You add money to your account, and based on your specified risk tolerance they divide it into investments in multiple countries, multiple industries, and between risky investments like stocks and less volatile ones like bonds.
The thing to remember is that just because one industry or country or investment category might be experiencing wild swings, it doesn’t mean that every industry is experiencing them.
And if you’re investing in all of them at once, it mitigates the highs and lows you might experience over the course of days, weeks and months, which makes it easier to ride out any sudden moves.
Just think: If you had been 100% invested in airline stocks over the past year, how would your portfolio look right now? Probably not great. But bundle those airline stocks into a portfolio that was also exposed to industries like tech and banking, and you probably didn’t lose nearly as much — you might have even had a good year.
2. Invest regularly
Your monthly budget should have a line item for long-term savings that you invest for retirement — even if it’s a small amount (everything counts).
Putting aside money monthly for your future self is obviously worthwhile, but one of the less discussed reasons for doing it is that it almost forces you into a strategy for dealing with market volatility.
Let’s say that you invest $12,000 a year for your retirement. If you put the entire amount in all at once, and the market crashes right afterward, it might be more challenging to keep your emotions in check.
But if you put $1,000 into your investments every month, not only is there less money going in right before a mid-year crash, you’ll also have money left over to invest at the lower levels the market moved to. Effectively, you’re buying more of the same investments for the same “price.”
Plus, since you’re investing monthly, you can set up automatic contributions and then forget about them, so you might not even notice when the stock market takes a dip.
3. Know your timelines
There have been some famously bad times in stock market history. Black Friday 1929 comes to mind, as does the housing crisis in 2008.
But the reassuring thing is the broader market trend over decades. Sure, markets can go down for months at a time, and sometimes even years. But over the long term, they tend to go up.
If you’re investing for your long term, like retirement, that’s a helpful frame of mind for when you see fluctuations happening in the market — and with the amount of news coverage that the stock market gets, you might see fluctuations even if you’re not looking for them.
Short-term fluctuations are a fact of life, and “short term” can be as long as a few years. But if you know you’re investing for the next 30 years, not the next two, it’s a lot easier to hold tight, keep investing on a regular schedule and ride it out.
4. Hope for the best, but make sure to plan for the worst
Everything we’ve talked about so far has assumed you’ve got a diversified portfolio of long-term investments. Even if that’s most of your portfolio, there’s always the option of adding in some riskier investments like individual stocks or cryptocurrency if doing so fits with your goals and you’re interested in them.
That said, you’re really upping the ante on the amount of volatility you’ll be exposed to, since individual investments like this can move much more quickly than the broader market, and much more often.
When the overall market gains or drops 10%, it’s a major breaking news story. When a single stock moves 10%, it’s a Tuesday.
That’s why there are two absolute musts to follow if you’re investing in these types of things:
Don’t invest more than you can afford to lose. You have to be OK with this investment going to $0. If you’re not, or if that would seriously impact your financial plans, it’s too risky — and you’re setting yourself up to make panicked decisions that aren’t in your best interest.
Only do this kind of investing outside your balanced, diversified portfolio. Once you’ve got a solid foundation in your investment account — one that will track the broader market — you can start putting some money into riskier bets, since the bulk of your savings aren’t going to tank if that one moonshot stock drops by 75%.
5. Don’t look at your investments
It can be challenging not to peek at how your portfolio is doing, especially with the easy access we now have with online investing tools. But if you can manage it, checking your investments on a schedule or not at all can help you avoid any impulses to take action based on market volatility.
Plus, there’s nothing more satisfying than someone asking if you’ve seen the crazy market news related to investments you hold, and getting to say, “Nope, hadn’t been paying attention.”
If your plan is set up well, you don’t need to pay attention — you can spend that mental energy on things that can actually make a difference in your life.
Because trying to time the market, or control market volatility, just isn’t one of them.
Fine art as an investment
Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.
That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.
Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.
And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.
On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.
Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.
Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.