Unless you live near an amusement park that does a lot of advertising, you probably didn't know that Aug. 16 is National Roller Coaster Day. Actual roller coasters provide people with thrills. But as an investor, how can you stay calm on the "roller coaster" of the financial markets?
Here are some suggestions:
•Know what's in front of you. If you've ever ridden a roller coaster in the dark, you may find it scarier than if you boarded it in daylight — after all, it can be unsettling not to know where you're going.
The same can be said about investing. If you have no idea what's in front of you, you might find the journey unnerving — and if that happens, you could make panicky decisions, which are usually bad ones. So prepare for the inevitable market volatility — it's a normal part of the investment landscape.
•Buckle up. When you're on a roller coaster, you need to buckle your seat belt or use a restraint. You want to have the excitement of the ride, but you certainly don't want to take unnecessary risks. And you can enjoy some of the excitement of investing without incurring more risk than you are comfortable with, too. One way to lower your risk level is to diversify across a range of investments — stocks, bonds, government securities, and so on. That way, if a market downturn primarily affects just one type of investment, you'll have some protection. However, although diversification can reduce the impact of volatility on your portfolio, it can't protect against all losses or guarantee a profit.
•Choose a strategy for the journey. Different people have different ways of handling a roller coaster ride. Some like to throw their hands up, enjoying the feeling of abandon, while others hold on tightly to the bar in front of them. When you invest, you also need a strategy that works for you, and the best one may be the simplest: Buy quality investments and hold them for the long term. How long is "long term"? It could be 10, 20, 30 years or more. Famed investor Warren Buffet says his favorite holding period is "forever."
If you've chosen a mix of quality investments appropriate for your risk tolerance, you may be able to hold them until either your goals change or the investments themselves undergo some transformation.
•Stay for the whole "ride." When you hop on a roller coaster, you've got no choice — you're staying until the ride is over. As an investor, though, you can exit the investment world whenever you like. But if you take a "time out" from investing every time the market drops, you risk still being out of the market when it rallies — and the early stages of a rally are often when the biggest gains occur. Furthermore, if you keep investing during a "down" market, you'll be buying shares when their price has dropped, which means your dollars can go further — and you'll be following one of the basic rules of investing: "Buy low."
You can't take out all the twists and turns of the investment road, but by following the above suggestions, you can help make the ride less stressful — and possibly more rewarding.
This article was written by Edward Jones on behalf of your Edward Jones financial adviser.