Surviving stock market volatility: Diversify, pull short-term cash, don't check your account daily
Here's how to endure some tricky times.
Though stock market volatility is nothing new, it can be difficult for investors to deal with nonetheless. And to say that the start of 2022 has been volatile would probably be somewhat of an understatement.
But while the market has been intense over the past number of weeks, the good news is that things should settle down eventually. Until that happens, here are a few ways to ride out the storm.
1. Pull money you might need in the near term out of the market
As a general rule, it's not a good idea to invest money you think you'll need within five years. And you definitely should not have your emergency fund invested in stocks, because you could end up locking in losses if or when you need that money in a pinch.
But you may have cash earmarked for relatively near-term goals in stocks, like the down payment you're trying to save up for a home. That's money that really shouldn't be sitting in stocks in general, and definitely not right now.
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2. Don't check your portfolio balance daily
Depending on your balance and specific holdings, you could be seeing your portfolio value drop by $10,000, $20,000, or more from one day to the next during this period of volatility. That's enough to drive even a seasoned investor to the point of panic.
It's for this reason that you should avoid checking your portfolio balance every day during rocky periods like the one we're in the midst of. Doing so could lead you to rash decisions, like selling off investments rather than waiting things out and avoiding losses.
If you really must check your portfolio balance on a frequent basis, limit yourself to once a week. But if you're not planning to tap your portfolio anytime soon – say, your investments are all earmarked for retirement savings purposes and you plan to work another 15 years – then why torture yourself?
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3. Make sure you're well diversified
A diverse portfolio could make it easier to ride out periods of market volatility, so the one scenario where it does pay to check on your portfolio is to make sure your assets are spread out across different segments of the market. If you see that you're too loaded in a single segment, you'll know to shift things around.
You can also diversify your holdings by investing in broad market exchange-traded funds (ETFs). These allow you to own a bunch of different companies with a single investment. For example, if you buy S&P 500 ETFs, they'll effectively give you exposure to the 500 largest publicly traded companies.
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Another good way to diversify your portfolio is to look at REITs, or real estate investment trusts. REITs are known to pay above-average dividends, which means they can be a nice source of income. The value of REITs also doesn't always rise and fall in direct correlation with stock market movement, so they could buy you some protection when things get dicey.
Stock market turbulence is something a lot of investors struggle with. If the past few weeks have left you feeling unsettled, know that you're not alone. At the same time, take these important steps to help yourself get through these rocky times unscathed.
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