Learn how to better prepare your portfolio for a downturn – and how to potentially take advantage of one when it occurs.
Market volatility is an inevitable part of investing. And, understandably, tumultuous times will likely trigger emotional responses to match.
But it’s important to take a deep breath, focus on your long-term financial plan, and consult with a trusted professional, one who has seen an unpredictable market or two and the subsequent recoveries.
Your first defense against volatility is crafting and maintaining a balanced portfolio. Effective asset allocation and diversification can broaden your reach in the market and potentially reduce your risk during periods of turbulence.
Volatility often affects individual sectors and asset classes differently, so diversifying across various classes, sectors and securities reduces the chance of one narrow decline devastating your overall portfolio. Additionally, paying attention to how your assets are correlated – how much they tend to move in the same direction – may help insulate your returns from the negative effects of volatility.
While diversification and asset allocation don’t assure a profit or protect against loss in declining markets, they do provide the opportunity to reduce risk, temper volatility and enhance risk-adjusted returns.