The stock market is notoriously irrational. It experiences major ups and downs, sometimes based on nothing more than a negative news story.
Take the Dow Jones Industrial (DJI) for example. In December, it reached an annual low of less than 22,000. This was a sharp decline from its peak of nearly 27,000 just two months prior.
This 19 percent decline was largely driven by trade tensions with China and rising interest rates. However, corporate earnings and the economy are still relatively healthy.
In order to be an effective investor, you should not fall prey to market volatility. Read on to explore 4 pro tips for controlling your emotions during volatile markets.
1. Stop Obsessively Following the News
Some investors become obsessively attached to the companies in their portfolio. They watch the stock ticker all day, following each nominal increase or decrease in share price.
The same is true for the news cycle that profits off of negative stories. Remember the old adage that no one pays for good news. Cable news coverage is overwhelmingly negative and leads to emotional decision-making.
So the recommendation is pretty straight forward; turn the TV off. Close your laptop screen and stop following your portfolio’s changes to the minute.
2. Invest in Index Mutual Funds
Market volatility is partially attributed to the risk level of each investment. For example, small-cap stocks are significantly more risky than large, reputable companies.
A small cap stock can see their market capitalization vanish rapidly. Major companies, such as Wal-Mart or Coca Cola, are more stable and see modest price swings.
Investing in index funds is one way that your mutual fund manager mitigates this risk. This is a great diversification strategy that prevents you from placing all your eggs in one basket. Instead, your returns depend on the performance of a collection of companies rather than one or two.
3. Trust Your Financial Advisor
One of the best tips to control your emotions is placing your trust in a successful financial advisor. An experienced money manager has lived through the stock market’s highs and lows.
They know when the market is acting irrationally. In fact, a professional sees irrational dips in the stock market as a buy opportunity to increase returns.
4. Portfolio Diversification and Data-Driven Approaches
Your financial advisor is not making decisions on a whim. Instead, professionals tend to take a data-centered approach.
Feel free to communicate and ask your financial planner what indicators they like to use. For example, many wealth managers look at the long-term track record of mutual funds. The fact that a fund earned 18% one year is not as important as what the average has been over the last 10 years.
Diversifying your portfolio is another effective strategy. Instead of solely investing in stocks, your advisor is likely to select a combination of stocks, bonds, and CDs.
Control Your Emotions During Market Volatility
Market volatility has the potential to drive you crazy. Consider the emotion swings as one of your top stocks drops by 5 percent in a single day.
Playing the long game will eliminate much of this stress. If you enjoyed this article about navigating market volatility, check out our blog for other great articles.