Stock market volatility can arise from various factors, including economic uncertainty, inflation, geopolitical conflicts, and natural disasters, resulting in sharp value fluctuations. Impulsive investment decisions during these times often lead to poor outcomes. Thus, investors may want to consider adopting a patient approach in times like these. We’re seeing more headlines unfold around heightened geopolitical concerns in the Middle East, growth concerns out of China (the global growth engine) and a sputtering employment market in the U.S. These factors could certainly lead to plenty of uncertainty, making it important for investors to focus on controlling the controllable factors within their control during periods of volatility.

In my view, the following three tips put forward by most financial gurus are some of the best tips I try to live my life by. Here are the three checklist items I think investors ought to focus on first, to keep one’s portfolio in check during what I think could be much more volatile times on the horizon.

Key Points About This Article:

• Volatility could be picking up in financial markets, meaning investors may want to create a checklist of to-do items to mitigate the effects of this volatility on their portfolios.
• Here are three of the top pieces of advice I’ve seen most financial gurus provide for how to traverse such periods of wild price swings.
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Focus on Diversification

Diversification simply means spreading investments across various asset classes, industries, and regions to minimize overall portfolio risk. By holding a mix of investments, poor performance in one area can be balanced by better results in another, resulting in more stable returns.

The idea of risk-adjusted returns is a fancy term various folks in the financial industry have come up with to weight returns by risk level. Greater diversification reduces overall market risk (which can’t be eliminated, only reduced), increasing a given investor’s risk adjusted returns relative to their peers.

Now, that’s not to say these portfolios are likely to beat the market. In fact, they’re likely to underperform over the long-term, as the market has more up years than down years. Warren Buffett has also famously called out diversification strategies in the past, with his portfolio remaining highly concentrated in a few names.

But for investors who smell something brewing in the market (given all the recessionary indicators we’re seeing) and who don’t buy the idea that this economic landing will be as soft as most expect, diversification can be a great idea right now. Personally, it’s something I do via holding most of my invested capital in index funds (which have very low management fees and do all the work of picking stocks for me), but to each their own.

Rebalance Your Portfolio

Portfolio rebalancing involves adjusting the weightings of assets within an investment portfolio to maintain desired risk levels. Similar to a car tune-up, rebalancing one’s portfolio can allow for stocks that have run incredibly high in a short amount of time to be trimmed, and added to positions that have slightly underperformed on a relative basis. No one ever got hurt taking profits, and while it’s also generally true that winners tend to run longer than many think, maintaining some reasonable range for each portfolio sector or position can reduce risk over the long-term. This ties back to the previous note on diversification, and it’s a take-it-or-leave-it piece of advice. 

In my view, portfolio rebalancing can be very helpful, particularly if the positions within one’s portfolio are picks one truly believes in long term. If stock A and B each have similar expected returns over the long-term, and stock A greatly outperforms stock B in a given quarter or year, trimming one to buy more of the other can allow an investor to simply be in better balance (or the desired long-term balance at the onset of the creation of the portfolio).

Upholding a predetermined asset allocation for a given investment portfolio can lead to discipline and true long-term thinking. In my view, that’s the real benefit of rebalancing. Investing is a marathon, not a sprint, so staying in it for the long-haul is very important. 

Add Capital (Consistently) Over Time

Last, but certainly not least, being consistent with how one contributes to investment accounts is very important. 

Many investors are already acutely aware that compounding can work in their favor. The earlier an investor gets started putting some amount away each month, the more an investor should have in their retirement account when the time comes to sell. Starting early, and importantly contributing consistently, can lead to incredible gains over the very long-term.

Again, this speaks to the long-term investing mindset, and having the ability to invest over time as well. Managing a budget, with some pre-allocated investing amount coming directly out of one’s paycheck or checking account each month into an account, can help simplify the process and automate it. That’s what I do, as I try to listen to what the experts have done in this regard. I think it’s noteworthy advice for all investors out there in this current environment.

Finally, the beauty of investing consistently over time (in similar or increasing amounts) is that if the stock market does drop, buying more shares of companies can allow for greater performance over the long-term. Many traders and short-term investors sell low and buy high – this allows for truly disciplined investing over time, and that’s something I think everyone can and probably should aspire to.

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