Staying cool when the market is volatile

• Short-term market fluctuation can be caused by global and local sentiment-related factors.
• An emotional reaction to market volatility is natural, but may not be a reason to act.
• Responding calmly is more effective than allowing a hasty decision to knock you off your long-term approach.

Abdallah receives daily, weekly, and monthly updates on the performance of his portfolio. He is surprised by the frequent fluctuations he sees, and wonders whether he needs to act quickly in order to minimize losses or maximize gains. Experts recommend that the best way to react to volatility is with calm.

Why do markets fluctuate?

Market fluctuation is an inevitable part of investing and can have a visible impact on how your investments seem at the moment. Fluctuations often result from market sentiment and reactions to policy decisions, geopolitical events, corporate reports, or speculation. Whatever the reason, it is understandable to have an emotional reaction to them.

Common reactions to volatility

The urgency to act – either to stem losses or to maximize profit – can lead to hasty decisions. Panic selling or cashing in investments instead of rebalancing the portfolio are some common reactions to market volatility. These are the product of short-term thinking and can result in actual losses. 

How to respond calmly

• The right way to assess performance is in years, not in months or days. Short-term noise can cloud thinking and cause you to lose confidence in your own judgement. Trust professional advice on this instead of deciding in the moment.
• Volatility means both upward and downward movement. Holding on to more cash than your long-term strategy does not bode well for long-term returns. Following a method that includes regular investments at set periods can help offset volatility.
• Rebalancing with some guidance can help with risk-adjusted returns in the long term. The key is to stay systematic rather than speculative. Assessing and refining your portfolio or adjusting your risk profile are more effective responses to market volatility.
• Perform a diversification check on your portfolio. Ensure that it represents multiple asset classes and sectors. Diversification protects the investor from the impact of downturns.

Markets variations are a norm rather than the exception. Staying calm and true to the financial course you have set yourself is the most effective way to go. If you need to review your portfolio, strategize with your advisor or accountant.