

Column: Four strategies for managing volatility

3:00 PM, Dec. 27, 2013  |  Comments

For a long-term investor, perspective is important. If you have a fearful or negative attitude about volatility, you are more likely to make irrational investment decisions. On the other hand, if you have a good understanding of stocks and historical performance data, you will have a more rational perspective.

The fact is, highly volatile periods are normal; and past performance is not a guarantee of future results, it can be reassuring to see that the long-term trend in equity returns has continued upward. So, stay focused on your goals!

Once you're able to put things in perspective, use simple strategies such as these to prepare for and manage the economic reality of market volatility:

No. 1: Maintain a diversified portfolio

If your portfolio is properly diversified, meaning the assets have little or no correlation with each other, you may experience less risk and volatility. For example, the stock markets in some other countries tend to move in the opposite direction as the U.S. market, so including investments from outside of the United States can be a good way to diversify. Also be sure your portfolio includes assets from different market sectors, company sizes, asset categories and investment styles, as certain holdings often outperform or underperform during different economic conditions.

No. 2: Load up on bargains

A down market can be a good time for you to consider purchasing investments at lower unit costs. By carefully choosing investments to build and further diversify your portfolio at a time like this, you benefit from "bargain" prices as well as help protect from future market volatility.

No. 3: Stay cool

If you sell when you're in a state of panic, you most likely aren't thinking rationally and you could actually miss out on the market's best-performing days. Even worse, you will be left with the agonizing decision about the right time to get back in. Instead, stay cool and revisit your financial plan for reassurance that you have a well-thought-out strategy for reaching your long-term goals.

No. 4: Monitor the asset allocation of your portfolio

You and your financial representative worked together to assess your risk tolerance and goals in order to determine an appropriate asset allocation for your portfolio. By maintaining those percentages in each of the asset classes, you not only stay on track for your goals, but also reduce volatility during turbulent times, since the performance of more stable asset classes like bonds and cash tends to smooth out short-term equity fluctuations.

All investments involve risks, including possible loss of principal. The fund's share price and yield will be affected by interest rate movements. Band prices generally move in the opposite direction of interest rates. As the prices of bonds in the fund adjust to a rise in interest rates, the fund's share price may decline. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. These and other risk considerations are described more fully in the prospectus.

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