Market fluctuations occur frequently due to several global and domestic factors. These fluctuations can impact investment strategies and a portfolio’s worth. A positive swing in the market can result in an uptick in rewards for investors while a downward stroke can cause an increase in risk and lower overall returns. It is not possible to accurately predict fluctuations in the market. It is a good practice to continually keep an eye on the changing market conditions, or hire a financial advisor that can help ensure that your portfolio is on track and adapted to handle market fluctuations. This will allow you to adjust your financial plan at the first sign of trouble or position yourself well when a favorable market condition occurs.
Here are four things you can do to adapt your financial plan to the changing market conditions:
- Create a Buffer Fund
- Maintain the Right Portfolio Mix
- Assess and Manage Your Risk Levels
- Avoid Taking Financial Decisions Hastily
Markets tend to fluctuate from a stable to a volatile state. Although investment strategies tend to deploy all possible assumptions, one can never be sure how your portfolio will end up being affected. These changes end up causing a rise or fall in the market value of the investments. In both scenarios, a buffer fund can be a source of great help. In case the market suffers a downturn, the value of your investments may fall. In situations like this, you can use the cushion provided by your buffer fund to protect your financial plan from market fluctuations.
The crucial aspect while creating your fund is to figure out how much to keep in the buffer. The sweet spot is to save up to 15 to 20 percent of the value of your financial goals. You will also need to factor in inflation to provide an estimate. For example, if you plan on buying a house worth $10 million in the next 5 years, your financial plan should ideally earn you 15-20 percent more than the current value. In this particular case, the earnings should be equal to $11.5 to $12 million or more. The difference between the two figures is the buffer amount that will help you absorb the impact of market volatility and safeguard your investment. Additionally, the cushion also depends on how vital your goal is and the time available to you. Say, for instance, your objective is to start saving for retirement, your buffer can be moderate. But when the goal is to save for your child’s education with a restrictive timeline, the extra savings will need to be more substantial. Additionally, the buffer fund is also affected by the class of assets you’ve invested in. Stocks and equities being more volatile than debts and other securities require a more robust buffer fund to fall back upon.
Maintaining investments may lull you into a false sense of security that you’re adequately protected, but that might not be the case. If you’re not careful at all times, your overall plan may become exposed to significant risk due to market volatility. One of the best methods to mitigate this risk is by maintaining the right portfolio mix that takes into account your risk appetite, age, time horizon, and financial goals. You should work towards having a diversified portfolio that includes different asset classes such as stock, bonds, cash equivalents, etc., and asset categories, like large-cap, mid-cap, small-cap, and growth and value funds.
If you’re looking to invest at the age of 30, equity investments are a recommended investment option as you can accumulate significant returns given the risk capacity. But, for a person in his sunset years, looking to invest at the age of 60, risking asset allocation in equity might not be the best course of action. The goal should be to achieve stabilized returns with capital preservation. Therefore, you should look to offset risk. Additionally, you may protect your portfolio from market fluctuations by investing in multi-asset strategies. A financial plan that deals in active investments spread across several asset classes has a higher potential of gaining returns from multiple sources. It can also adapt to the changing market conditions more effectively. Last but not least, the risk can be balanced through diversification across several asset modules, subject to individual market conditions, which helps to balance the risk optimally.
When tackling market volatility, you must adopt a calm and prudent approach to risk management. Understand the market dynamics and how you can navigate market fluctuations without having to compromise on your financial goals. Get a better understanding of your risk tolerance and how far you can stretch it without becoming uncomfortable by undertaking active risk management. For instance, when going through a particularly volatile phase in the market, de-risk your plan by divesting funds from your high-risk assets by opting for more stable ones. However, this decision shouldn’t be made when you’re panic-stricken. It should be backed by cold facts and logic. The goal here is to keep a flexible and dynamic portfolio that can be adapted to the changing market fluctuations in a consistent manner. By following this strategy, an investor can navigate potential market shifts to spot opportunities of greater potential return. This also allows you to steer clear of areas wherein you can add further risk to the portfolio.
An important skill that’ll serve you well in troubled times is to avoid making decisions hastily. Due to uncertainty in the market, an investor may choose to act at once to either maximize his returns or minimize his losses. However, if you act in haste may cause you to fall short of reaching your ultimate goal. It is critical that you learn to not react at the moment so that you can sail through short-term market vagaries without acting hastily. If you pull out of the market during a low phase, you may lose out on potential market rebound gains. Long-term investors know that they will even out their returns when eventually the market rises again. Despite intra-year volatility, the S&P 500 Index recorded a positive return in 24 out of 30 years revealed by a study. Thus, the secret to enduring market volatility and safeguarding your portfolio is to stick to a long-term goal and maintain a well-diversified portfolio. Refrain from following a loss aversion strategy by focusing on acquiring gains in the long term.
Small fluctuations in the market have the potential to affect your financial plans if you fail to adjust in time. There, it is better to be prepared to handle the changes and uncertainty in the market. As was observed over the past year, the onset of the COVID-19 pandemic shook the strongest world economies. It is imperative that one must have a financial plan that can withstand the downward market swings.
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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.