Free Stock Tips

Conventional wisdom says that what goes up must come down. But even if you view stock market volatility as a normal occurrence, it can be tough to handle when it’s your money at stake.

One would think that there is no fool proof way to avoid market volatility other than; don’t invest there!

So what are some common sense tips to dealing with the volatility? Other than not investing at all in the stock market, there is no foolproof way to avoid the upsetting drops in the stock market.

However, when it comes to investing directly in the stock market, that old saying about not putting your eggs in one basket is very wise! Diversifying your investment portfolio is one of the key ways you can handle market volatility. Because asset classes often perform differently under different market conditions, spreading your assets across a variety of investments such as stocks, bonds, and cash alternatives (e.g., money market funds, CDs, and other short-term instruments), has the potential to help reduce your overall risk.

Ideally, a decline in one type of asset will be balanced out by a gain in another, but diversification cannot eliminate the possibility of stock market losses.

What does asset allocation mean? One way to diversify your portfolio is through asset allocation. Asset allocation involves identifying the asset classes that are appropriate for you and allocating a certain percentage of your investment dollars to each class.

As an example as a young aggressive investor, you could place 70 percent in stocks, 20 percent in bonds and10 percent to cash alternatives. Then, within the stocks specifically, you should spread the money into different asset categories such as utilities, financials, manufacturing, etc.

Is there a good side to stock market volatility? For those investors that are consistently investing a fixed amount of money, when the stock market goes down, they ultimately will buy more shares per dollar and so when the market goes back up, they will recover more quickly.

This strategy is called dollar cost averaging. With dollar cost averaging, you don’t try to “time the market” by buying shares at the moment when you think the price is lowest. In fact, you don’t worry about price at all. Instead, you invest a specific amount of money at regular intervals over time.

Most typically, that is monthly. When the price is higher, your investment dollars buy fewer shares of stock, but when the price is lower, the same dollar amount will buy you more shares. That will help you focus on the forest, not the trees. Think about long term, not the short terms ups and downs of the market.

How do you determine the level of risk that someone should expose themselves to? I use a couple of questionnaires and based on how the client answers the questions, it gives me an acceptable level of risk that they would be comfortable with. Then we put them into the appropriate investments based on their level of risk tolerance.