If you're an investor, you may be perplexed by the current volatility of the stock market. Recently, the Dow Jones Industrial Average experienced triple-digit movements. Given these extreme price movements, what should you do?
Here are some ideas to consider.
.Focus on what you can control. You can't control sub-prime mortgages, oil prices, the U.S. economy, Federal Reserve pronouncements or any of the various factors that may affect the stock market.
But you can control your investment decisions. Specifically, you can select quality investments, those that you wouldn't mind owning if we enter a bear market.
Historically, so-called "blue chip" stocks and investment-grade bonds have tended to bounce back more quickly at the end of market declines than those investments that are considered more speculative. Remember, though, that past performance is no guarantee of future results.
.Diversify your holdings. If you only own one type of investment, such as growth stocks, your portfolio may be particularly vulnerable to market downturns. But if you spread your dollars among a wide range of securities, stocks, bonds, certificates of deposit, treasury notes, etc., you may be able to lessen the effects of market volatility on your holdings.
That's because different investments don't always move in the same direction at the same time. (Keep in mind, though, that even a diversified portfolio can't guarantee a profit or protect against a loss in declining markets.)
.Know your risk tolerance. If you find yourself constantly agitated over the fate of your investments, you're probably taking on more risk than you should. Different people have different risk tolerance levels, so make sure you know yours.
At the same time, be aware that there are different types of investment risk. When you invest in stocks, you risk losing some, or all, of your principal. But if you opt for a less-risky portfolio consisting largely of fixed-income vehicles, you risk losing purchasing power, as these investments may not keep up with inflation.
You'll want to strike a balance between these different varieties of risk.
.Don't chase "hot stocks." It's always tempting to go after "hot" stocks. That's especially true when, during periods of market volatility, you spy a stock that seems to be "holding its head above water." However, by the time you invest in a "hot" stock, it may already be cooling off. Furthermore, it might not be appropriate for your needs and goals.
Conversely, don't rush to dump "losers," investments that may have lost value over the past several months. You'll need to work with your financial advisor to evaluate the merits of each individual investment in the context of your overall investment strategy.
.Look for opportunities. Market declines can present long-term investors with an opportunity to buy quality investments at a lower price. Remember that all market declines have had one thing in common: they've all ended.
Although we do not know where the markets will go in the future, the U.S. economy and financial markets have historically spent much more time rising than falling. So look for those quality investments, they're still out there.
These are strange days for investors. But if you follow the above suggestions, you can still achieve favorable results in the long term., Be patient, be disciplined and stay invested.
Michael Lader is a financial advisor with Edward Jones. His office is located at 4590 PGA Blvd., Suite 200 in Palm Beach Gardens. Contact him at (561) 776-8988 or visit the Web site www.edwardjones.com.