How to Manage Stock Market Volatility
It seems that everyone owns stock in one form or another. Most
investors own stock in the form of stock mutual funds, others own
individual stocks. However, just because an investor owns a stock or a
stock mutual fund, it doesn't mean they have an investment strategy.
Unfortunately, owning a stock and having an investment strategy can be
mutually exclusive and for many people it usually is. Not having an
investment strategy can wreak havoc on your retirement goals, but if you
combine not having an investment strategy with market volatility, you have
a recipe for disaster.
Market volatility is a double-edge sword. Some investors love it, some
hate it and some don't know what it is. Like or not, market volatility
will always be a part of investing. So, how can an investor harness their
emotions and take advantage of market volatility? There are nine ways to
benefit from market volatility and use it to help you reach your financial
#1: Set a Time Period for your Investments
Is that $5,000 earmarked for retirement 15 years in the future or do
you want to day-trade for quick profits? The amount of time you designate
to reach a goal will determine how aggressive or conservative you will be.
For example, if you invest $10,000 for a retirement house 10 years in
the future, you have the time necessary to ride-out any downward movement
in the stock market. Just because the value of your account declines from
$10,000 to $9,000 in one month doesn't mean you lost money. You only lose
money if you liquidate your entire portfolio when it is worth $9,000. You
will have lost $1,000! However, if you have 10 full years until you need
the money, that $10,000 may grow to $12,000 or so. It won't matter how the
market fluctuated during those 10 years, because you didn't need it. Set a
time period for each investment you make. To get a better understanding on
setting investment goals
#2: It's Time, not Timing
Studies have shown that investors tend to make more money by investing
in the market over time verse timing the market. The difference between
the two is vast. Many financial professionals agree that investors should
not try to guess the "best" time when to buy a stock. How many
times have you waited for a stock to decline to buy it, only to find out
it never declined as much as you thought but went on to set new highs? It
has happened to the best of us. Wall Street has a famous saying that goes:
"More money has been lost trying to squeeze the last 1/8 of a
point out of a stock than for any other reason."
That statement shouts volumes of wisdom to those willing to listen.
To many investors diversification is a bad word. They argue against
diversification because they have seen only the technology sector
delivering tremendous returns. In reality, over the past several quarter's
technology stocks have delivered the some of the best returns. However,
this phenomenon is probably a once in a lifetime experience. No other time
in stock market history has a sector returned some much wealth in such a
short time. But what happens when this tech bubble bursts? The money from
this sector will flow to other areas of Wall Street. However, nobody
really knows which sectors will benefit when/if the technology sector
corrects. That is why it is wise to diversify into other sectors to take
advantage of sector rotation or unexpected opportunities.
#4: Take Advantage of the Dips
Market volatility is the movement in the underlying stocks. The
movement is both up and down. When to market goes down, good companies
become cheaper to purchase. If the price of ABC Company goes from $50 a
share to $40 a share, does it mean that ABC Company is a bad company? In
most cases it does not. It only means that you can now purchase more
shares of ABC Company at a cheaper price. Take advantage of dips in the
market on good companies.
#5: Invest in what you Know
One of best ways to take advantage of opportunities in the marketplace
is to know what opportunities can be available in the marketplace. In
other words, know the future potential of the companies you invest in. For
example, if you understand the mountain biking industry and locate a
company that manufactures a sports water bottle that keeps water tasting
fresh for 10 hours, it may be a good investment. Mountain bikers like to
drink fresh tasting water, not old, stale water. This product may sweep
the market and become an industry leader in sports water bottles. Due your
own due diligence on your portfolio.
#6: Buy Great Stocks
Buy stocks that have outstanding product lines, solid sales, good
growth potential and strategies to take advantage of current technology.
In addition, try to invest into companies that are industry leaders or
have the potential to become an industry leader. The advantage of being an
industry leader is that other companies will develop products around your
companies core business, thus potentially increasing its market value.
#7: Follow Your Own Lead
Are tips goods? If you work as a bartender or waitress, tips are great,
but taking stock tips may wreck your portfolio. The downside about taking
stock tips is that you only hear one side of the tip. Usually you only
hear when to buy, not when to sell. For example, what happens of you get a
tip on a great stock at a Sunday afternoon picnic and you decide to invest
into the stock on Monday morning? On Monday morning you would own the
stock. However, Monday afternoon the company issues a warning on the
up-coming quarterly earnings, what do you do? Do you hold, do you buy more
or call the "tipper" to ask when you should sell? Usually the
tipper won't even remember talking with you about the stock, so your stuck
with the possibility of losing money and all the stress that comes with
it. So don't take tips. Do your own research.
#8: Read, Watch, Listen, "Think and Grow Rich"
In today's world, information is a commodity. So how you sort through
all the sources of information available to make a good investment
decision? The first step is to read the leading newspapers and web sites
for investment ideas. Next, watch and listen to the financial news
channels for information and news on companies and industries. Draw
information from as many different sources as possible. This will assist
you in obtaining an unbiased and well-rounded understanding of the
financial markets. Finally, think. Think about all of the information you
have learned. Compile the information into a strategy for your future.
#9: Make a Decision
Knowledge is not worth a dime unless you put your knowledge to work.
Once you have all the information you need to make a decision, make the
best decision you can with the information you have and then move on. This
will help to eliminate stress in your investment life. Good Luck.
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