Stock market fluctuations are a normal occurrence. Although it may not always feel “normal” to see your portfolio value fluctuate, this is how the market works for stocks, ETFs, and mutual funds. There are additional assets that will fluctuate in value but may not be priced daily, such as real estate and privately held businesses. We refer to this category of investments as “owning” and when you own a piece of these assets the value of them will fluctuate over time. Being prepared for fluctuations in your portfolio is crucial for maintaining a disciplined investment approach. Throughout this article, I’ll explain factors that impact the pricing of your investments, strategies to mitigate risks in your investment portfolio, and how you can be prepared for market fluctuations.
The stock market allows for publicly traded companies to be bought and sold by individual investors, institutional investors, and market professionals. This allows for diverse participation in the stock market. The companies that are listed on the stock market are continuously priced throughout the trading day based on supply and demand dynamics. This is what causes the value of the stock to fluctuate.
Investors will interpret many factors to make an educated decision on whether to buy, sell, or hold a particular stock. To have a fair and efficient market, the companies that are publicly traded on the stock market are required to report financial data to the public. The information that is reported by these companies will be reviewed by investors to help them determine what they believe is the fair market value of the stock. Economic indicators will always influence investor sentiment and expectations, causing stock prices to fluctuate. For instance, positive economic news may boost investor confidence, leading to higher stock prices, while negative news can have the opposite effect. A few other factors that may impact stock pricing are geopolitical events such as wars, elections, or trade agreements, the change in interest rates, technological advancements, market sentiment, and emotional intelligence. As you can tell, many factors can impact the pricing of stocks and that is why you will see the value of these companies fluctuate continuously throughout the trading day.
Understanding how the pricing of the stock market works is just one part of the equation. You’ll additionally want to look at strategies you can take to mitigate the risk in your investment portfolio. One of the most common strategies is called diversification. This involves spreading investments across various asset types, sectors, geographic locations, and company sizes. The premise of this strategy is to not have all your eggs in one basket. By diversifying your investments, you can minimize the impact of a downturn in a particular area. Additionally, diversified portfolios tend to be more stable, allowing for more balanced returns.
An additional strategy to minimize risk is to determine the asset allocation of your money. This refers to the process of deciding how to distribute your investments across different asset categories, such as stocks, fixed income, and cash. By determining your asset allocation, you can align your portfolio with your risk tolerance, investment goals, and time horizon. Another important piece of asset allocation is rebalancing. Market fluctuations can cause certain assets to become a larger or lower percentage of your portfolio. By rebalancing, you can periodically adjust your portfolio to maintain your desired asset allocation over time. The last strategy I’ll mention is a golden rule we have in our practice. That is to never put short-term money in long-term investments. We consider investments that are “owning” to be long-term. By strictly putting long-term money in a long-term investment, you can weather short-term market fluctuations and avoid any short-term emotional decisions. We believe putting short-term money in a long-term investment is speculating.
Being prepared for downturns in the market can be the difference in reaching your goals or falling short of them. While market downturns can be unsettling, they’ll happen throughout your investment journey and it’s important that you prepare for not if, but when they happen. Maintaining a cash reserve or an emergency fund of 6-12 months of your living expenses can provide a safety net during market downturns, allowing you to avoid selling investments at a loss if an emergency occurs.
Additionally, adopting a long-term mindset with your investment can help you focus on the bigger picture. Too often investors let short-term emotions affect their long-term investments. With a long-term perspective, you can stay calm during market fluctuations knowing that the short-term volatility is a part of your plan to reach your long-term goals. The last piece of advice to help you prepare for downturns in the market is to educate yourself on what you’re investing in. By being educated on your investment strategy you are empowered to follow through with your plan. If you are not comfortable investing on your own, you can seek help from a trusted advisor who can tailor a strategy that aligns with your risk tolerance and financial goals.
Preparing for stock market fluctuations requires a combination of understanding your investments, mitigating risk, and developing a disciplined investment strategy. By taking a strategic approach, you can navigate market volatility with confidence and work toward achieving your financial objectives.
-by Jacob Young, AAMS®
Financial Advisor, RJFS
313 East 10th Ave.
Bowling Green, KY 42101
Phone: 270-846-2656
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Ben Smith Life Compass Financial is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
