Worries of recession and stalled trade-talks with China have created an environment of uncertainty — and markets don’t like uncertainty. Large daily drops in the S&P 500 Index of 1% to 2% occurred several times in the month of August. What should you do with your portfolio during these volatile times?
When a portfolio loses value in uncertain markets, it’s natural to wonder whether you should sell. Sometimes, investors do so without considering how the decision will affect their long-term goals. While selling isn’t always a mistake — perhaps, your asset allocation is out of balance or you want to harvest tax losses — selling without a strategy may be erroneous.
Here are a few tips from Fidelity and CNBC that can help investors avoid mistakes and make the most of opportunities during periods of market volatility:
• Keep perspective. As the examples above demonstrate, stock market downturns are normal. Historically, markets have recovered and delivered positive returns over the longer term.
• Stay the course. Our natural instinct for self-preservation leads some investors to sell when markets drop. This locks in losses. In the past, when investors have been patient, they’ve recovered lost value when markets moved higher again.
• Buy low. During periods of market fluctuation, wealth managers may find opportunities to buy stocks of attractive companies at attractive prices. By investing in well-priced opportunities, investment advisors may position their clients for stronger performance.
• Review your asset allocation. If you haven’t done it recently, review your asset allocation strategy. Does it still match your target allocation? Sometimes, after periods of strong market performance, a portfolio will need to be rebalanced.
• Review your risk tolerance. If market volatility is causing you to lose sleep, it’s possible your risk tolerance has changed or is lower than you anticipated. If that is the case, reducing overall portfolio risk may be a wise choice. Talk with your financial advisor before making any changes.
• Harvest tax losses. Talk with your financial advisor and tax professional about whether you could benefit by selling investments during a downturn and taking the losses for tax purposes.
• Consider a Roth conversion. If you’ve been thinking about converting a Traditional IRA into a Roth IRA, completing the move during a market downturn could reduce the amount of taxes owed.
Whether you’re investing for short- or long-term financial goals, it’s important to recognize the opportunities created by market volatility, and work with your financial advisor to make the most of them.