Six Investing Tips for a Turbulent Market
Posted on February 21, 2018
For some people, investing in the stock market can be intimidating in the best of times, but recent swings in the value of individual stocks and the market as a whole make it especially challenging.
On Tuesday, the Dow Jones Industrial Average briefly fell more than 200 points in early trading. Walmart reported weaker-than-expected earnings, pushing the stock down nearly 10 percent. At the same time, the Standard & Poor’s 500 and Nasdaq composite traded higher on Tuesday, lifted by strong gains in tech stocks.
This comes after the S&P 500 reached an all-time high on Jan. 26 before falling more than 10 percent by Feb. 8. The Dow had its largest ever single-day point drop on Feb. 5.
Experienced and novice investors alike might ask themselves, “What do I do during market ups and downs?”
Dr. Kyre Lahtinen, assistant professor of finance at the University of South Alabama’s Mitchell College of Business, said investors have nothing to fear if they are properly prepared for such turbulent times. His advice is to consider these key points:
1. Know your risk tolerance.
Before committing any money to the stock market, understand how much risk you can handle. A good indicator of being invested in assets that are too risky is the amount of personal discomfort experienced during downturns.
2. Determine what return you need to earn.
The less risk you are willing to take, then the lower return you are typically able to earn. Understanding how much you actually need your money to grow will guide you to invest in a comfortable way. If you don’t need the higher return of the stock market to meet your goals, then you may be able to avoid it altogether.
3. Identify your time horizon.
Many people make the mistake of putting money in the stock market that they will need in the short term. A good rule of thumb is to remove money from the market if you believe you will need to use those funds within the next five years. For example, don’t put that down payment you’ve been saving for that new car or house into the market if you need it soon.
4. Avoid trying to time the market.
Timing the market means jumping in and out of the market frequently in an attempt to miss the downturns but enjoy the upturns. In practice, timing the market is extremely difficult to do. Most investors who attempt to time the market end up selling at the bottom and buying at the top, exactly the opposite of what you want to do. It’s better to be consistent and methodical when adding money to your investments.
5. Understand the assets that you buy.
Large returns can be very enticing, but we should never invest in an asset that we don’t understand. Avoid throwing your money around at the newest fad, trying to chase extreme returns. If you don’t understand how the asset works or how it gains its value, then you open yourself up to vast risk that you might not want.
6. Seek professional help with your investments.
Just as physicians benefit from having others diagnose their illnesses, investors benefit from having others help guide their investment portfolio. Seek out a financial planner or financial advisor. These industry professionals will help you avoid many of the biggest mistakes you can make with your money; they have the experience to guide you through turbulent times and they can teach you how investing works so you can have the level of comfort you need.
Dr. Kyre Lahtinen is the faculty advisor to the Jaguar Investment Fund, the University of South Alabama’s student-managed investment fund. He earned his Ph.D. from Florida State University. He has published research in the areas of asset pricing, market risk, financial advising and behavioral finance.
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