Stock market volatility is a normal part of investing. But what you do – and don’t do – during times of higher volatility can make the difference between success and failure as an investor. The following these principles can help you manage volatility and achieve your long-term investment goals.

 

Stay calm and invest on

 

When the markets are particularly volatile, there’s a natural tendency for investors to move into safer investments, hoping to avoid further losses, and wait until the markets recover. But unfortunately it’s nearly impossible to predict when the markets will recover. As a result, investors may miss out on the eventual recovery, which can negatively affect their long-term investment goals. As the chart (below) shows, the investor who stays invested tends to do better than the investor who bails out and misses even some of the recovery.

 

Avoid market timing

 

Some investors try to improve their returns by attempting to “time” the market – selling right before the markets go down, then buying right before they go up again. In theory, this sounds great. But in practice, it rarely works, simply because it’s so difficult to predict when the markets will go up or down.

Unfortunately, that doesn’t stop investors from trying, which is why the “average investor” tends to under perform virtually every asset class.

 

Why it’s best to stay invested

 

 

Market recoveries following major downturns (S&P/ TSX)

 

 

 

Maintain your sense of perspective

 

Unquestionably, stock market downturns can be painful, especially when you’re in the middle of one. It’s not always easy, but it’s important to remember that downturns have happened before – and will happen again – and that historically, as the table above shows, the markets have always recovered and reached new highs.

 

Stay diversified

 

Diversifying your investments is a proven way to reduce market volatility. It involves including a certain mix of stocks, bonds and cash in your investment portfolio, as well as investments representing different industry sectors or geographic areas. At any given time, one type of investment may do better than another. So by diversifying between them, you can offset weaker performers with stronger performers, reducing volatility. What’s more, as the table (next page) shows, it can be difficult to determine exactly when one type of investment will do better than another, which is why it makes sense to stay diversified.

 

Look for opportunities

 

“Summer sale! Prices slashed!” When it’s a retail store saying those words, it’s usually a good thing. Yet when it’s the stock markets, people often have the opposite reaction. When prices drop, they sell instead of buy. But when the stock markets go down, it can be fairly indiscriminate: both good and bad stocks can be caught up in the sell-off. What that means is, during a market downturn, there can be some high-quality stocks, likely to be among

the first to bounce back, available at temporarily reduced prices.