How to think about investments during market volatility

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Investors had a rocky start to 2022 as markets tumbled. In January, the S&P 500 had its worst month since the start of the pandemic, falling almost 10% in a matter of weeks.

While historically high inflation and the threat of imminent Federal Reserve interest rate hikes have a lot to do with the market moves we’ve seen, whenever our investments lose value, it’s naturally a source of concern.

If you’re worried about market volatility, you’re definitely not alone. There are, however, ways to rethink your thoughts about your investments so that you don’t spiral every time the market drops.

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Remember that market volatility is expected

There’s a reason putting your money in the market comes with risk: you can lose it as fast as you can grow it. This is the reality of investing.

“When they see several weeks of volatility, many investors begin to question their strategy and wonder what else they could do to protect their portfolio,” says Tony Molina, CPA and Senior Product Specialist on the robo-advisor Wealthfront investment platform. “But it’s important to remember that the ups and downs we’re experiencing right now are a completely normal part of investing.”

While market declines can be stressful in the moment, they’re short-term moves you really shouldn’t worry about, Molina warns, because they’re out of your control.

“These day-to-day fluctuations are of little importance to the long-term accumulation of your investments and should not impact your overall strategy,” he explains.

Investing is a long game

This year so far has reminded us that the market does not always go up, but it is in an investor’s best interest to stay the course. Investing is a long game where you will most likely benefit from perseverance over time. In fact, not giving your investments time to grow is one of the the biggest investment mistakes that financial experts recommend avoiding. Ideally, you should hold your investments for as long as possible to maximize your returns. This is especially true if you invest in index funds that track all markets, such as the S&P 500 or the Nasdaq.

“The market has always had an upward trend over time, so you have to think longer term,” says Molina. “Investing is a long game, and no one can time the market, so it’s important to keep your money invested or you could miss out on potential future gains.”

Keep in mind the importance of diversification

“Having seen a recent sell-off in tech stocks in particular, this is a good reminder of the importance of diversification when you invest,” adds Molina. “Placing the vast majority of your investments in a diversified portfolio can help insulate you from the potential negative consequences of one or two sectors experiencing a greater downturn.

With diversified funds, your money is spread across various securities, so it’s more likely that when some stocks in your portfolio go down, others go up and make up for the loss. Instead of putting your money in individual stocks where the risk is concentrated in that one company, invest in a large number of companies through pooled investments like mutual funds and ETFs offered by a broker.

For example, Charles Schwab has a special tool, its ETF Picklist, to help you determine which funds are best for you. For mutual funds, Schwab also offers the Custom Portfolio Builder, which helps investors build a diversified portfolio based on information provided about their financial goals.

Those new to investing who are concerned about market volatility, consider a robo-advisor, which will build you a diversified portfolio based on your risk tolerance, time horizon and investment goals. Additionally, robo-advisors automatically rebalance your investments over time based on market conditions and how close you are to your investment goals.

Two pioneers in the automated investing space are Betterment and Wealthfront, both of which have low annual account fees of 0.25% of your fund balance. So if you invested $5,000 in either, you would only pay $12.50 each year. SoFi Invest® offers automated investment robo-advisor functionality and charges no account management fees

Female investors, in particular, may want to consider the Ellevest robo-advisor. Its platform algorithm considers important realities of women’s lives, such as pay gaps, career breaks, and longer life expectancies, so women can get a true sense of their financial situation. . Ellevest offers three different membership levels, ranging from $12 to $97 per year.

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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.

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