Staying the course with your investment goals
Daily market fluctuations highlight why a combination of discipline and perspective is key to reaching investment goals. One way to achieve this fine balance is by having a plan and sticking to it through all types of market conditions.
This may sound easy, but investors have been put to the test in recent years. Veering off course from a carefully thought-out plan can turn a temporary loss of confidence into a realized loss on an investment portfolio.
1. Use time to your advantage
Investors who maintain perspective and stay mindful of their investment time horizon have a better chance of reaching their investment goals than those who react to short-term market fluctuations.
Staying invested and trying not to “enter and exit” the markets when volatility increases can help reduce fluctuations over the long term. Years of strong equity markets can outweigh periods of decline, resulting in long-term returns that typically outperform other asset classes.
2. Maintain discipline
Reacting to short-term market “noise” by making dramatic portfolio changes, like moving in and out of the markets, can have a negative impact on achieving your long-term investment goals. History shows that by maintaining discipline and perspective during market downturns, a patient investor will often be the one rewarded when markets return to an upward path.
As market decline increases, investors have a natural tendency to want to move into safer investments, hoping to avoid further losses. However, this move can result in needlessly locking in losses on investments that, given time, may recover. A key to overcoming this emotional reaction is to refrain from trying to time the market. Selling at the wrong time and missing just a few days of a market recovery could have a significant long-term impact on your portfolio.
3. Diversify your portfolio
Diversification, long considered the golden rule of investing, remains key to reducing portfolio volatility and risk.
Diversification means including in your portfolio a combination of investments from different asset classes — including cash, fixed income, and equities — as well as different industry sectors, geographic areas, and investment styles. Financial markets do not always move in concert with one another, and individual asset classes perform differently in any given year. At any time, one asset class may be leading the market, while the others lag.
Diversification can help reduce the impact of market volatility on your overall portfolio by combining assets that react differently to changing market conditions. It can be difficult to predict which asset classes will lead the market each year and which ones will underperform.
4. Regularly rebalance
Market fluctuations can often cause a shift in how your assets are divided in your portfolio (also known as asset mix drift), leading to a very different asset mix — and investment experience — than originally intended.
Rebalancing is one of the more effective ways to stay on track to reach your investment objectives. Not only does it help keep your portfolio aligned with your investment goals, it also gives you the opportunity to lock in gains from one asset class and redeploy them to other asset classes that have become relatively inexpensive.
5. Invest regularly
Investing a fixed amount on a regular basis ensures that your investment strategy remains a priority through all types of market conditions.
Contributing smaller amounts of money to an investment on an ongoing basis (biweekly, monthly) acts as an anchor to help you maintain discipline when market conditions become volatile.
Regular investing also provides the opportunity to help smooth out returns over time, ultimately reducing overall portfolio volatility. This is achieved because investing a fixed dollar amount on a regular basis gives you a chance to buy more investment units when prices are low and fewer units when prices are high, thereby producing a more level investing experience over the long term.
This article is provided by Lauri Binius Droster, CFP, The Droster Team and senior vice president, financial advisor at RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Wealth Management is a division of RBC Capital Markets LLC, member NYSE/FINRA/SIPC.
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