Many travelers become nervous when their airplane experiences turbulence. And if you’re like many investors, you may be jumpy when financial markets are volatile. Yet flight turbulence probably isn’t as scary as it seems, and the same may be true for market volatility — if you know how to respond.
Let’s look at some positive responses to market movements:
• Don’t overreact. Turbulence happens on most flights, but passengers know they can’t “bail out” at 30,000 feet, so they generally don’t panic. Similarly, investors should avoid panicky behavior by not taking a “time out” from investing. Over decades, if you missed just a handful of the market’s best-performing days, your returns could be dramatically reduced. And the best days often follow some of the worst.
• Balance your “cargo.” The ground crew properly positions an airplane’s cargo to maintain the plane’s center of gravity and reduce turbulence effects. Similarly, investors need to achieve balance by owning a variety of vehicles, including stocks, bonds, government securities and certificates of deposit. While this type of diversification can’t guarantee profits or protect against loss, it can reduce market volatility's effects on your portfolio.
• Match your 'transportation method' with your goals. If flying from New York to Los Angeles, you may experience delays or changes in the flight plan — but your goal is still to reach Los Angeles as quickly and efficiently as possible. When you invest, you will also encounter events, such as market downturns, that you feel may slow progress toward your long-term objectives, such as a comfortable retirement. So don’t abandon your long-term strategy in favor of quick fixes, such as chasing after “hot” stocks that may be unsuitable for your needs.
• Maintain perspective on your “flight path.” When you’ve flown, you’ve probably observed fellow passengers sleeping through turbulence. In the investment world, these types of people are the ideal long-term investors — they know market fluctuations are normal because they’ve experienced them many times before. Their perspective isn’t on short-term events, such as volatility, but rather on the voyage toward their “final destination” — achievement of long-term goals.
When you fly, fasten your seatbelt and relax. And when you invest, don’t overreact to short-term events. By following these basic guidelines, you will be a calmer traveler and a better investor.
Joe Faulk is a financial adviser.