Facing volatility

The only certainty in life is uncertainty. Whether the fear is coming from geopolitical events, economic policy changes, or some other anxiety-causing event, the reality is that periods of market volatility are something that every investor will have to learn to cope with. After all, if you have a long-term investment horizon for your portfolio, a multi-decade timeframe can’t be
all clear skies and easy sailing.

But when the VIX heats up, what’s the right way to respond?

It can be all-too-tempting to engage with the headlines and hysteria about the market’s latest gyrations. But by focusing on the long-term, controlling emotional reactions and considering some strategies designed for volatile environments, you’ll stay saner – and more secure in your commitment to your ultimate investing goals.

1. Focus on the long term
Just as volatility will inevitably crop up, we have history on our side in believing that it will eventually ebb away. Assuming you are investing in the pursuit of goals with a longer time horizon – retirement, or college tuition for your second-grader – historically investors have benefitted most from staying in the market for the long-term, even in difficult periods.

2. Control your emotions
For many (most) investors, their portfolio statement is more than just numbers. It represents the difference between an easier future with a wide array of choices, or something more constrained. Even more than its literal value, the success (or lack thereof) of a portfolio or investment strategy can be very personal, particularly for those investors who rely more heavily on their own research and picks, representing a good deal of emotional investment as well as financial. So it’s no surprise that periods of volatility can be nerve-wracking. But reflexive reactions are rarely the right way to go.

3. Consider strategies that seek to minimize volatility
If you’re so inclined, there are some portfolio moves to consider when volatility seems to be on the horizon. Some so-called smart beta ETFs are designed to deliver similar exposures as other funds tracking a broad market index, but the constituent investments are screened so that the funds seek to minimize volatility. If you (and potentially your advisor) agree that these funds may be an appropriate fit for your portfolio, there are a few different options that you might wish to explore.

No matter what the market has in store, there are things you can do to be ready – and fortunately, most of them are pretty simple! Even if you don’t think minimum volatility funds are right for you, adopting the right mindset in periods of turbulence can be key to riding out the storm and ultimately ending up where you want to go.