October 21, 2013
Recent market volatility in response to the federal government shutdown and debt ceiling showdown has naturally unnerved many investors. Some people may elect to make drastic changes to their portfolios to shield themselves from financial losses. But while making fundamental shifts to your portfolio during turbulent market weather may feel like the proper course of action, it may not serve your best long-term interests. T. Rowe Price's financial planners advise investors to maintain solid long-term investment strategies rather than make sudden allocation shifts that could hurt their ability to reach their financial goals.
Five Ways Investors Should Respond to Market Volatility and Uncertainty
- Stay the Course. Periods of uncertainty and volatility in the financial markets are inevitable—in fact, they may seem to occur quite frequently. This underscores the need for investors to stay focused on a long-term investment strategy with broad diversification and an appropriate asset allocation (i.e., how you divide your portfolio among stocks, bonds, and other assets). If you do not have a good long-term strategy and an appropriately diversified asset mix, now is a good time to establish them.
- Resist the Urge to "Do Something." The temptation to respond drastically to market volatility-such as shifting a significant portion of your equity assets to less volatile fixed income securities—may be strong if you are concerned that short-term events will cause losses in your portfolio. However, what feels good in the short term can cause problems for you over the long term. In other words, "going all to cash" may protect your portfolio from possible short-term losses, but it could hurt your ability to achieve long-term financial goals that require capital growth over time. It may be easy to get out of the market, but it's much more difficult to know when and how to get back in.
- Keep Contributing to Your Accounts. If you stop contributing toward your financial goals—such as retirement or saving for your children's college education—because of increased volatility or fear of losses, you may further undermine your ability to reach your financial goals. While it would be nice for market appreciation to do the "heavy lifting," the truth is that what you contribute to your account—a factor that, unlike market volatility, is within your control—will have the greatest impact on your financial success. The earlier you begin saving and investing, the more time you have for your capital to grow.
- Check on Your Portfolio Periodically. In general, as you approach your financial goals, your asset allocation should become more conservative—which means your stock allocation should decrease over time while your fixed income allocation should increase. But from time to time, your asset allocation may stray from where you want it to be due to market fluctuations, new investments, withdrawals, and other factors. If this happens, you might consider rebalancing your portfolio on a regular basis, such as annually. This will help get your portfolio back to a level of risk with which you are more comfortable, and it can help you reach your goals.
- Build and Maintain an Emergency Fund. An emergency fund is your own personal safety net that can help you maintain control and possibly peace of mind, especially during periods of economic or financial market uncertainty. If you've lost an income source, you can use the money in the emergency fund to help pay your everyday expenses—including your mortgage payment—without having to increase your debt or take funds out of your 401(k) plans, IRAs, or other accounts you have set up to save for specific goals. We recommend an emergency fund that can help cover about three to six months of your expenses. The money should be kept in a regular account that you can access at any time and in more stable investments, such as a bank savings account or money market mutual fund.
An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.