Market Volatility is Nothing New
The stock market has always been volatile and is likely to stay that way. Remember Black Tuesday? Many consider that fateful day to be the worst in U.S. economic history for spawning the Great Depression. And in recent years, the market has been downright brutal at times (think Black Monday, the largest one-day crash in history, or even the summer of 2011, when a downgraded US credit rating courtesy of Standard & Poor’s caused the market to tank). Political unrest, whether domestic or abroad, can shake the market to its core; the same holds true for natural disasters, like tsunamis and hurricanes, and health crises, such as the Ebola or Zika outbreak.
But there’s good news, and it’s that the market also has a strong history of rebounding. In fact, it took only two years to recover from Black Monday. Another thing to keep in mind is when the market takes a hit and your portfolio loses value in the process, it’s only a loss on paper — meaning, you don’t actually lose any money unless you sell off your stocks at a price lower than what you paid for them.
Protecting Yourself in the Face of Volatility
While the market may be unpredictable, you can protect your financial interests and rest assured by taking a few smart steps. For starters, don’t rely on your stock portfolio to fund a major short-term purchase (like a house or car), supplement your emergency fund, or help pay the bills. Though the market is more likely to recover than not, be willing to be in it for the long haul — meaning, 10 years or more. Otherwise, you do run the risk of losing money by being forced to sell off assets at a time when market conditions may not be favorable.
Diversifying your portfolio is another strategy for limiting your risk and resting easy. While the term may sound fancy, “diversifying” simply means putting your money in different places. If, for example, you choose to invest only in healthcare, and several pharmaceutical companies unexpectedly go bankrupt or are forced to pull their drugs off the market, your portfolio could wind up taking a significant hit. On the other hand, if you invest in a number of different industries, your portfolio value is less likely to plummet if a single sector is plagued with negative news or publicity.
Finally, make sure your stock portfolio represents just a single component of your overall investment strategy. Bonds, money markets, and mutual funds are generally considered to be safer options. You can even branch out to areas such as real estate to limit your exposure to stocks. But even if your portfolio is fairly stock-heavy, you’re still likely to come out ahead in the long run if you invest wisely.
The next time the market takes a hit, stay calm, and take comfort in its history of ultimately serving long-term and smart investors well.