Investing in Volatile Markets: How to Keep Calm and Carry On

Investing for the future? These tips can help you stay the course through ups and downs.

Sharp climbs and quick drops can make a stock market chart look a lot like a roller coast. If you’re investing in volatile markets and watching those fluctuations up close and personal, you may experience the same stomach-churning sensations. Excitement builds as your balance increases, but fear can set in if it drops abruptly.

Investing in volatile times, when the value of your investments repeatedly and quickly rises or falls, may heighten these feelings. But making reactive decisions based on short-term fears of losing money can harm your long-term financial health. Although it may be uncomfortable at times, learning tips for investing during volatile markets, and how and why to stay the course, could better serve you in building wealth and achieving lasting financial success.

Illustrated graph depicting the ups and downs of investing

Surprise: Investing can be risky

Whether you’re investing in volatile times or not, there is undoubtedly some inherent risk in any investment. But that doesn’t mean investing isn’t worthwhile, says Robert Johnson, a certified financial analyst and president and CEO of The American College of Financial Services, a nonprofit, private college in Bryn Mawr, Pennsylvania.

“When you save something, you don’t want to take the chance of losing it,” Johnson says. But, for long-term financial goals, he prefers to focus on investing rather than saving because, “the way to build wealth over the long run is to prudently embrace risk in the equity markets,” Johnson says.

Don’t worry. You don’t necessarily have to be a risk taker to make investing work for you and your money. There’s a key difference (emphasis on key difference) between embracing some risk and taking unnecessary risk. Especially if you’re investing in volatile times, you may want to adopt strategies that can help limit your exposure to major market fluctuations.

Take control: Ways to manage risks

Having a diversified investment portfolio is a common investment strategy and tip for investing during volatile markets. If you’ve already diversified, skip ahead to the tip on keeping a long-term approach.

Couple meeting with their financial advisor to discuss investment strategy

Diversification is an important way to manage the risks intrinsic to investing. By spreading your investments out among different companies, industries, areas of the world and asset classes (such as stocks and bonds), you can help limit the impact of downturns in a particular market on your overall portfolio. So if you’re investing in volatile times and one of your markets loses some value, that loss could be offset by simultaneous gains elsewhere. You win some. You lose some.

Taking a long-term approach could also help reduce risk when investing in volatile markets. To demonstrate this clearly, Brad Kingsley, a personal finance coach in Charleston, South Carolina, likes to show people rolling returns—or the yearly average return for a specific period—over various lengths of time. He does this using the S&P 500, an index of the 500 largest U.S. companies based on their market capitalization.

Using three-year periods as an example, Kingsley explains that investors could either have an annually compounded 30 percent positive return or be down nearly 20 percent, depending on the three years in question, say 1997 to 2000 vs. 1999 to 2002. This shows how powerfully a volatile market can impact the value of investments over such a short time frame—there’s a huge difference between being up 30 percent and down 20 percent.

“The way to build wealth over the long run is to prudently embrace risk in the equity markets.”

– Robert Johnson, president and CEO of The American College of Financial Services

But if you stick it out for longer (three years may sound like a lifetime, but not so when it comes to investing), the results can be better for investors. In the best-case scenario, Kingsley says that over a 20-year period, investors have earned an annually compounded return ranging from about 5 percent to 15 percent.

“Therefore, money invested for short periods of time has much higher volatility and risk,” Kingsley says. “People who ‘stick it out’ for at least 15 years—preferably even longer—tend to have the best results from their investing.”

Get started: Tips for investing during volatile markets

It can be easier to accept the idea of long-term investing when markets are on the rise. However, buy-and-hold investors, those who purchase stocks and hold them for long periods despite changes in the market, must feel comfortable investing in volatile markets. Volatile markets are a fact of life, after all.

Here are a few tips to consider when investing in volatile times:

  • Work with a professional. A financial advisor or planner can offer many services, including recommending investments and rebalancing your portfolio. An advisor can also act as a calming voice during large market swings and help ensure you don’t let short-term worries keep you from realizing potential long-term gains.
  • Use dollar-cost averaging. Dollar-cost averaging is an investment strategy that involves investing set amounts at set intervals—e.g., every two weeks or every month—no matter if prices are on the rise or decline. Implementing dollar-cost averaging can help take the guesswork and emotions out of investing in volatile markets, Johnson says.
  • Don’t check in every day. Whether you’re checking an app on your phone or logging into your brokerage account from a computer, it can be easy to see how much you’ve “gained” or “lost” each day. Unlike checking in on social media, constantly checking your investments can get your heart racing, which might not help you during downswings and can lead to poor decision making if you overreact. “What I would suggest is that people monitor their investment accounts much less frequently than daily, perhaps even simply quarterly,” Johnson says.

Man checking his investments from his mobile phone

Stay the course: Slow and steady could win the race

No investment can offer guaranteed returns. Still, building a diversified portfolio and staying the course during short-term market fluctuations could help your long-term outcomes when investing in volatile markets. Following the tips for investing during volatile markets can help relieve some worry, but even so, it’s not always easy to tolerate the ups and downs.

“There is an old Wall Street adage: You can eat well or sleep well,” Johnson says. “If you invest in a diversified portfolio of stocks, over the long run you will eat well. But you will experience some sleepless nights when the equity markets are volatile.”

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