Trying to navigate the ups and downs of market returns, investors seem to naturally want to jump in at the lows and cash out at the highs. When markets fall, the natural instinct is to sell. But no one can predict when those will occur. Investors that attempt to follow a market timing strategy are exposing themselves to a considerable amount of risk.
Market timing is an investment strategy that attempts to capitalise on market fluctuations in order to obtain higher returns or lower risk. In practice timing the market is notoriously difficult. It can also be costly and seldom works.
Time-tested strategies
Fortunately, there are a number of time-tested strategies that may help you deal with market volatility without trying to predict future market movements. Time is one of the best assets that many investors have.
Two of the most prevalent are: invest for the long-term, and maintain realistic performance expectations when it comes to returns.
Proper portfolio diversification
By coupling these strategies with maintaining proper portfolio diversification and avoiding the pitfalls of market timing, you will have the foundation needed to help manage your overall exposure to market volatility.
Historically, the stock market has been up more than down. Often after a lengthy bull (rising) market, some investors may lose sight that their investments could generate negative returns. In order to keep market volatility in perspective, it is important to maintain realistic expectations about your investments, especially if returns move closer to their historical average.
Focus on long-term goals
It is important to focus on your long-term goals and not become distracted by short-term volatility. While losing money in the financial markets is never easy to accept, remember the old adage, time is on your side.
Typically, the longer an investment portfolio is held, the more likely overall positive results are realised. Investing at regular intervals is an effective and potentially less stressful approach to building wealth over the long run.
The lesson here is to prepare for the long haul and try not to overreact to periods of uncertainty.
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