Investors are all too familiar with a volatile market, or one that struggles to find a trend. The current market has put together a near six-year run higher, but over the last few weeks broad indexes have struggled to maintain a positive direction. It is short-term volatility like this that causes headaches for some investors. The best way for you to combat this kind of behavior is to make a detailed investment plan and always stick to it.
Make a Plan
The most important thing you can do as an investor is to create a plan for how you want to utilize your capital. The first step is to lay out exactly what you want to accomplish. Is your goal to grow capital aggressively or to create a steady income stream? Perhaps it lies somewhere in between. Once you have a goal, you lay the foundation for your investment plan and make your portfolio work for you.
You may choose to allocate a certain percentage of your assets to a specific asset class or sector, and you may choose to favor a certain fund or security. Whatever your choice may be, ensure that it will help you achieve your long-term investing goals.
Now comes the tough part: sticking to the plan.
Stick to the Plan
Volatility spikes and the psychology of markets can make it easy to get worked up about a certain position in your portfolio. But when markets move back and forth, and headlines call for absurd bull/bear scenarios, your goal is to remain calm and stick to the plan. When you abandon your investment plan/strategy, you set yourself up to become a victim of emotional investing, which often results in losses.
Instead, keep your long-term goals in mind and understand that short-term volatility is a natural occurrence and there is little you can do to control it. That is not to say that you can’t amend your plan to fit your needs or a new market environment – in fact that is a healthy exercise. But any changes to your plans should always be in order to better achieve your long-term goals, and not because the market has had a few crazy days.
The Bottom Line
Making a plan is something every investor is capable of, but sticking to the plan is the tricky part. It can be easy to let headlines or emotions temporarily influence your investment decisions, but it is almost always a mistake. Remember that you laid out your investment plan for a reason and that you are striving towards a goal that runs deeper that any short-term jostling on The Street.
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