[Investing] Five suggestions for coping with market fluctuations

summary

• In today’s era, digital technology connects the world and puts countless information at our fingertips, which may lead to more frequent short-term market fluctuations.
• When a major sell-off occurs, sensational headlines and negative news coverage can make the situation even more unsettling, often swaying investors’ resolve to execute on their long-term investment plans.
• There is no foolproof way to deal with market ups and downs, but the following tips should help.

1. Be steady and persevere

Short-term volatility is an integral part of the investing processThe market will fluctuate in response to news or valuations and corporate earnings expectations. Investors need to remember that fluctuations in financial markets from time to time are to be expected.History may not repeat itself, but it will always be strikingly similar. Short-term volatility can occur at any time, but it does not necessarily hinder the long-term growth of the stock market. Historically, markets have rebounded sharply after severe setbacks, including economic downturns and geopolitical events (Figure 1).Although hot news will affect short-term market sentiment and lead to lower asset valuations, in the long run, stock prices should ultimately be determined by fundamental factors. Therefore, investors should avoid panic selling during periods of volatility to avoid missing out on a potential market recovery.

2. Continuous investment

Investing for the long term increases the chance of positive returns

When the market is unstable, investors are likely to be affected by market conditions and delist to stop losses. However, investors who focus too much on short-term market fluctuations may end up buying high and selling low. Past records show that although financial markets fluctuate in the short term, they are still on an upward trend in the long term (Figure 2).

While market recovery patterns are not set in stone, the aftermath of a consolidation is often a critical time to participate in the market. Staying invested for the longer term tends to have higher return potential.

3. Stay spread out

Diversification helps smooth out volatility

Simply put, diversification means “don’t put all your eggs in the same basket.” Different asset classes tend to perform differently under different market conditions (Figure 3).

By incorporating assets with different characteristics into investments, the risks and performance of different investments can be integrated, thereby reducing the overall risk of the investment portfolio. This means that lower returns on one asset are compensated for by higher returns on another asset.

4. Stay alert

Market downturns can bring investment opportunities

Don’t be pessimistic about market declines. When market sentiment is sluggish, valuations tend to be depressed, leading to investment opportunities (Figure 4). When the market goes up, people tend to invest in order to get a return, and when the market goes down, they tend to sell. When investors overreact to market conditions, they risk missing out on some of the best days.

Although market movements are unpredictable, when “everyone” is severely pessimistic, it is usually the best time to invest.

5. Invest regularly

Not swayed by market fluctuations

Regular investing means continuing to invest regardless of changes in market conditions.

When an investor makes a regular fixed-amount investment, he or she buys more units when prices are lower and fewer units when prices are higher. This helps to smooth out fluctuations in the investment process and balance the average price of units purchased (Figure 5), thus reducing the risk of making a one-time investment at the wrong time, especially when the market is volatile.

The longer you invest, the better, as this gives your investment more time to grow (the compounding effect).

The chart above shows how investing $1,000 per month would compare to investing $12,000 in one lump sum. One year later, the total investment is the same, but the total number of shares purchased and the cumulative value are higher with regular monthly investment (dollar dollar averaging). In this hypothetical example, dollar-cost averaging would have a lower average cost per share than a lump sum investment (i.e., $0.9 versus $1). Note that dollar-cost averaging may not always be better than lump-sum investing.