How to Brace Yourself For Stock Market Volatility

It can be unnerving when markets swing back and forth. Here is how you can prepare.

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Wall Street volatility is here and it's the complete opposite of what we’ve all come to know and expect. The markets rollercoaster of ups and downs over the past few weeks can lead to some sleepless nights and even outright panic.

But volatile markets are the precise time when we need to keep cool and stay faithful to our long-term investment plans.

Warning: it won’t be easy! Despite your best efforts to keep focused and stay the course, there will be plenty of encouragement to do the exact opposite.

Beware of the negative or confusing influences and develop strategies to keep them to a minimum.

Stop Listening to the Media

There’s nothing the media likes quite as much as disaster, and stock market volatility is one of those disasters. People tune into them looking for answers. Don’t be one of them.

Once markets come unglued, there will be lots and lots of theories, but few bankable strategies. So if you pay too much attention to the multitude of theories going around, all you’ll get out of it is confusion and fear.

Avoid the “Prophets of Doom”

Anytime financial markets become volatile — particularly to the downside — a cottage industry develops around the Prophets of Doom. They’re a fraternity of self-appointed experts who are 100% sure of what the future holds, despite the doubt that seems to plague everyone else.

Some even become overnight stars, as the media searches for anyone who has the willingness to make some sense of the chaos. Many will have books and video packages that promise to make you rich in the down market.

As tempting as it is to follow these Prophets of Doom — who seem to know what’s going on — don’t be fooled. All investment advisors/experts are right for a season, but none are right forever. Likewise with these prophetic-type experts.

They’ll have their moment, but once that moment passes they’ll sink back into obscurity. Just make sure they don’t take you down with them.

Sit Back, Relax and Wait It Out

Despite the change in market sentiment, the best approach overall to market volatility is to stay calm and make changes only at the fringes. Always remember you will make more intelligent decisions in a state of peace.

Your challenge will be to create that mindset and act accordingly. Continue on the path of your long-term investment strategy and do your best to not be sidetracked by the panic of the moment.

Just because the world gets crazy doesn’t mean you have to join them.

Only Make Minor Modifications

When things start to look unpredictable, it’s more important than ever to stay as close to your original strategy as possible. You don’t need to either a) take on a new investment philosophy or b) begin selling off entire market positions.

Volatile markets are neither the time nor the place to make wholesale shifts. It's better to stay with your original strategy — the one you implemented during more settled markets and created with a clear mindset.

You can make modifications in your investment strategy, rather than wholesale changes. Some of those modifications might include:

Avoid buying new stocks until the market settles down. If you’ve been buying stocks aggressively in a rising market, it's time to stop doing so, at least until the market settles down. By not taking new positions, you’re reducing your exposure to market declines without engaging in large-scale selling. If the stocks you bought earlier were good long-term plays, they should continue to be so despite the volatility.

Start raising cash. The money you aren’t using to buy new stocks should be accumulated in cash. Not only will that reduce overall portfolio volatility, but it will allow you to build reserves for future purchases. Every declining market eventually goes up, and having a growing pile of cash is the best way to position yourself for the turn.

Be prepared to hunt for bargains. If the market is volatile, it probably won’t reach a level of stability until it has fallen by a significant amount. Once it does, your strategy should shift from accumulating cash, to buying stocks at deep discounts. Since you never know when a market bottom will occur, it’s important you continue to research potential bargains on a continuous basis. You should develop a list of such bargains that you plan to buy into when the market settles down. Once it does, you’ll already have your pile of cash and your list of stocks — you‘ll be way ahead of most everyone else.

Brace Yourself for More Stock Market Volatility

Volatility is a part of the stock market, and a loose strategy to deal with it is absolutely necessary. That doesn’t mean taking a wrecking ball to your portfolio and rebuilding it from top to bottom.

But some small, gradual changes are all you need to ride it out and be ready for the next move up — while doing it with a minimum amount of churn along the way.

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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