A volatile stock market can be stressful for anyone who has invested a chunk of change. Here, Aadil Zaman and Syed Nishat of the Wall Street Alliance Group, offer their top 5 tips for successfully navigating through market volatility:
Be mentally prepared for market declines.
Market corrections are an essential part of a healthy market. At any point in time, an investor should be prepared for a 10 percent to 20 percent pullback. If the recent two-days fall made some investors feel restless and stressed, then it may be time to reassess their risk exposure to make it more conservative. On the other hand, corrections present an opportunity for those investors who are sitting on a large amount of cash to identify entry points in the market to put their money to work.
Factor in rising interest rates
. Recent data has shown that the economy is improving with unemployment falling and GDP growth increasing, which will eventually lead to inflation pressures. One of the responsibilities of the Federal Reserve is to control inflation, and this is accomplished by raising interest rates. As the market adjusts to the realization of higher interest rates, it may fluctuate. Therefore, while designing an investment strategy, it is essential to take higher future interest rates into consideration.
Watch the municipal bond market
. Volatility could cause a short-term fall in the municipal bond market, which may create an opportunity for investors who are in a higher tax bracket. Consider that a yield to maturity of 3.5 percent per year on a high grade insured municipal bond that is trading at par is equivalent to making a 5.83 percent per year after tax return for someone who is in the 40 percent tax bracket - and that too, with very low risk.
Stay away from leveraged ETFs.
Leveraged ETFs are bad news for the individual investor. These are complexed products that are often misunderstood and could cause market volatility as well as distortions.
Identify your worst-case scenario.
This is an important exercise for investors, so they can understand their pain threshold. At present, the likelihood of a market decline to the extent of what happened in 2008 is low, however, one should always ask, "What if 2008 happens again?" Understanding this worst-case scenario will help investors stay calmer and have an investment approach that is closely aligned with their individual level of risk tolerance.
With greater participation in the stock market through machine trading, ETFs and robo advisors, volatility is here to stay. For this reason, it is important for investors to take into account a high degree of market fluctuation in their portfolio design. As everyone’s situation is unique, be sure to discuss any decisions with your financial advisor.
Source: Wall Street Alliance Group
Published with permission from RISMedia.