Investing in a Turbulent Economy

Investing in a Turbulent Economy

By Scott A. Love, Investment Adviser Representative, Investment Partners, LTD

Over the past couple of months, the equity markets have made wide swings. Although there is no infallible way to handle these swings, the following tips can help mitigate the ups and downs in the markets.

Diversification

One of the most important ways to diversify your portfolio is through asset allocation. Asset classes typically perform differently under different market conditions, and spreading your assets across a variety of investments such as stocks, bonds and cash equivalents (like money market investments and CDs), can potentially help reduce your overall risk.

Ideally, a decline in one type of asset will be balanced out by a gain in another, but diversification can't eliminate the possibility of market loss. Asset allocation involves identifying the asset classes that are right for you and allocating a certain percentage of your investment dollars to each class.

Focus on Time Horizon

The markets go up and down every day – sometimes in very wide swings – and it’s easy to become too focused on day-to-day returns. Instead, focus on your long-term investing goals and your overall portfolio. Although only you can decide how much investment risk you can handle, if you still have years to invest, don't overestimate the effect of short-term price fluctuations on your portfolio.

Risk Tolerance

When the market goes down and losses increase, investors are often tempted to move out of the stock market altogether and look for less volatile investments. The small returns that typically accompany low-risk investments may seem attractive when more risky investments are posting negative returns.

But before you engage in a different investment strategy, make sure you're doing it for the right reasons.

Putting a larger percentage of your investment dollars into vehicles that offer safety of principal and liquidity may be the right strategy for you if your investment goals are short-term or you're growing close to reaching a long-term goal such as retirement. However, if you still have years to invest, keep in mind that stocks have historically outperformed stable value investments over time, although past performance is no guarantee of future results.

Dollar Cost Averaging

The silver lining of a down market is the opportunity you have to buy shares of stock at lower prices. One of the ways you can do this is by using dollar cost averaging. With dollar cost averaging, you don't try to "time the market" by buying shares at the moment when the price is lowest. In fact, you don't worry about price at all.

Instead, you invest money at regular intervals over time. When the price is higher, your investment dollars buy fewer shares of stock, but when the price is lower, the same dollar amount will buy you more shares. Although dollar cost averaging can't guarantee you a profit or avoid a loss, a regular fixed dollar investment may result in a lower average price per share over time – assuming you continue to invest through all types of markets. Remember, markets will fluctuate and you must consider your ability to continue investing during periods of low price levels

Monitoring and Rebalance

While focusing too much on short-term gains or losses is unwise, so is ignoring your investments. You should check up on your portfolio at least once a year – but more frequently if the market is particularly volatile or if you have been through significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance. A financial professional can help you decide which investment options are right for you.

Don’t Get Caught up in Emotion

As the market recovers from a down cycle, euphoria quickly sets in. If the upswing lasts long enough, it's easy to believe that investing in the stock market is a certainty. Of course, it never is. As many investors have learned the hard way, becoming overly optimistic about investing during the good times can be as detrimental as worrying too much during the bad times. The right approach during all kinds of markets is to be realistic. Have a plan, stick with it and strike a comfortable balance between risk and return.

Scott A. Love is an Investment Adviser Representative with Investment Partners, LTD, in New Philadelphia, a strategic partner of Rea & Associates. He can be reached at 330.308.9707 or slove@invp.com. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.