January 23, 2012 by tfroberts

Increasing market volatility has become a way of life. Although we have not seen the swings of 2007 through early 2009, this year has seen extreme volatility. Weeks and even days of several hundred points swings, in both directions, on the Dow Jones average have become commonplace. In the first week of August alone, two of the Dow's 11 best days in history alternated with two of its 11 worst daily point losses ever. Other indices such as the S&P 500 and measures of international and small company stocks have seen similar volatility. If this continues what can you do to avoid investment anxiety and protect your portfolio?

First... Understand that all investments have risks. Some, such as stocks, have volatility risk. This affects us if we think we may have to sell a part of this investment when the market is down. We can avoid this by identifying other sources of cash so we will not be forced to sell.

Second... Put time on your side. Over time, daily portfolio variances become less important than performance over several years. Position your investments for the longer run and the daily swings become less worrisome. The definition of "longer run" depends on your situation. If you define longer run as only a few weeks or months, you are speculating not investing.

Third... Know your limits. Know when you start to feel uncomfortable with swings in the value of your investments. This means periodically taking the time to evaluate your situation and future plans, then adjusting your portfolio risk to this reality.

Fourth... Diversify. Diversified portfolios do not experience the extreme swings of concentrated portfolios.

Finally... Be strategic. Set your investment strategy first based on your situation and long term expectations. Look at the current and several year future trends. Use this to refine your allocation and specific investments. Don't hyper focus on today. Immediate, emotional events tend to cloud the long term decision process.

Do you have the right perspective?