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Sound Investing During Market Volatility

Aug 21, 2007
Recent Increases in the volatility of the financial markets have many investors thinking about their portfolios and wondering if they should make changes. This is therefore an excellent time to discuss the importance of maintaining a disciplined approach to diversified investing.

Here are four key points to keep in mind about disciplined, diversified investing during periods of market volatility:

1) Diversification is a tool designed to reduce risk. In the financial markets risk and reward go together. Higher reward investments tend to carry greater risk. Although all investors would like nothing better than a high reward investment that carries low risk, it is important to remember how rare that is. When one diversifies one's portfolio, it is to reduce risk. We do not diversify in order to maximize reward, rather we diversify in order to reduce risk and portfolio volatility.

2) If one's portfolio is properly diversified, then one need not carry around a great deal of anxiety about the daily ups and downs of the market. With reduced volatility that proper diversification brings, one need not become either exutant in an up market nor dejected in a down market. Instead one maintains a centered, approach to long term investing - not overreacting to market volatility.

3) Asset allocation and diversification is best done by calendar rather than by reactivity to market conditions. One of the biggest traps for investors is to get excited and buy when markets are rising (thereby buying high) and to get scared and sell when markets are falling (thereby selling low). The best way to avoid this is to review one's asset allocation at a regularly scheduled account review.

4) One of the best ways to build wealth is to take a longer time horizon to your investments. Sound investments, held over a long time horizon is the approach that we find works best. As Warren Buffet has said "in the short term the stock market is a voting machine, in the long term it is a weighing machine." In a short time horizon, emotions and group psychology rule the ups and downs of the markets. In the long term, the fundamental value of sound investments will rule the day.

Investors may well be in a better position to ride out the short term volatility we see in today's markets by maintaining the discipline of diversified asset allocation with a longer time horizon.
About the Author
Peter Cole ChFC, LCSW, Holistic financial planning. Author: True Self True Wealth. Peter Cole is a representative of Securities America, a registered Broker/Dealer member NASD/SIPC and Securities America Advisors an SEC registered investment advisor. FREE newsletter at http://www.trueselftruewealth.com
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