If you followed the stock market this past week, you know it was a wild ride for investors. First, the Dow Jones Industrial Average lost nearly points over the course of two days, largely due to fears about an economic slowdown in China.
5 Investing Do’s and Don’ts To Deal With Stock Market Volatility - EBONY
Then the Dow powered back over the next two days, posting a gain of nearly 1, points. All in all, it was a tumultuous experience for anyone who buys stocks or mutual funds.
Here are 5 do's and don'ts to follow to successfully deal with all stock market volatility; now and in the future. Even though investors think they act rationally — on the basis of information, or research into a company or industry — when the going gets tough, most people panic. It's a bad idea when you let yourself be ruled by emotion: Greed kicks in when the market is doing well, and you don't know how to take profits and run.
Fear can overtake you when you see a huge sell-off is occurring. One way to avoid working against your own financial interests is to work with a trusted financial professional — like a Certified Financial Planner, investment manager or qualified stockbroker. Any of these individuals can help you to avoid acting impulsively when the stock market is zigzagging.
You should know ahead of time the factors that would cause you to sell: The idea is to know in advance what you will do when your investments move — either to the upside or downside. And then you have to stick to your sell strategy. It's called having a "sell discipline. A stop loss order is an electronic trading order that kicks in automatically when a stock falls by a certain pre-determined amount.
The sell order happens automatically, without you having to think about it or decide what to do. Your stop loss orders should be for money invested for short or medium-term purposes.
Even if the markets decline dramatically, rest assured knowing that stocks move in cycles. It usually takes only 18 months or less for financial markets to recover after major selloffs. For example, they don't want to cut off commissions or they don't want to hurt the firm's chances of winning corporate investment banking business — in case their company might want to advise a business on an IPO initial public offering or provide strategic counsel to a firm considering a merger or acquisition.
The net result of all of this is that it translates into enormously rosy forecasts about publicly-traded companies and a hugely disproportionate number of recommendations by analysts. For example, a recent CNBC story pointed out that among 53 analysts following Facebook, only one had a "sell" rating on the company.
And it goes to show you that you can't rely on Wall Street analysts to guide you about when to buy, sell and hold your investments. Do ensure that you're properly diversified When you have adequate diversification in your portfolio, it's about the right asset allocation, or mix of investments.
The individual stocks, bonds or funds you choose aren't as important, because a diversified portfolio will help you ride out shocks to the markets.
Diversification should be done across many areas: Again, good diversification acts as a cushion against wild swings in the market. Follow these 5 dos and don'ts and you won't have to worry about the day-to-day vagaries of the financial markets. You'll be able to sleep well at night no matter what the markets are doing.
Lynette Khalfani-Cox is a personal finance expert and co-founder of the free financial advice site AsktheMoneyCoach.
How to Deal with Stock Market Volatility | Continum Financial Partners
Follow Lynette on Twitter themoneycoach and Google Plus. Avoiding Financial Panic All in all, it was a tumultuous experience for anyone who buys stocks or mutual funds. Don't be your own worst enemy Even though investors think they act rationally — on the basis of information, or research into a company or industry — when the going gets tough, most people panic.
Do have a selling strategy You should know ahead of time the factors that would cause you to sell: Have a pre-set game plan for limiting losses, as well as locking in gains.
Do use stop loss orders to hedge risk A stop loss order is an electronic trading order that kicks in automatically when a stock falls by a certain pre-determined amount.
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How to deal with stock market volatility?