No matter which index you use to measure last year’s stock market returns—the results are the same—they were great!
But as the following chart shows—while we are still on an upward trend in 2014—the seas have become a lot choppier.
Many investors think that volatility is a dirty word, but with the proper strategy and tools, you can make the most of it—using the down periods to add to your portfolio, and cashing in and taking gains during the rising cycles.
With that in mind, I thought it might be worthwhile to offer a few ideas to help you more profitably navigate the volatility that seems to have found a home in the markets of 2014.
1. Define your investment strategy. What are your time horizon, your risk tolerance, and your ultimate investment goals? If you’re a person who has 30 years until you retire, you can afford to be a bit more speculative in your investments—aiming for the larger returns. And you also won’t care too much about month-to-month volatility, as you have a long-time investing horizon ahead of you. But if you are 75, and are looking to supplement your retirement income, or build a nest egg for your heirs, you will most likely be more conservative in your approach.
2. Buy investments that match your personal strategy. You’ll just sleep a lot better if you’re comfortable with the places you put your money, especially if the market has some big swings.
3. Diversify—by market cap, industry, country, and asset class. That way, when part of your portfolio has a bad day, you’ll have other investments that will shine.
4. Try to invest for the long term. Investors and pros—since the beginning of the stock market—have wasted a lot of time (and money) trying to time the market—getting in and out at the optimum time. But study after study shows that trading is best left to the pros and those investors who have money to lose. Average investors invariably suffer the most—getting into and out of the market at exactly the wrong times, and really hurting their returns. It’s best to find good, fundamentally strong companies and stick with them unless there’s a good reason (and not just market fluctuations) to sell.
5. Use dollar-cost averaging to boost your returns—especially in volatile periods. The strategy is to buy a fixed dollar amount of an investment on a regular schedule, regardless of its price. That way, you’ll pick up more shares when prices are low, and fewer when prices are high.
Eventually, you’ll reduce your average purchase cost, while—at the same time—decrease the risk that you put too much money in one investment at exactly the wrong time.
6. Protect your portfolio with stop losses and target sell prices. Although I don’t advocate frequently trading stocks, I do believe that maximizing your gains also includes minimizing your losses. If a stock is on a momentum downward trajectory, sometimes it’s hard to stop that train. So take your losses, and you can always re-enter at a lower price, if it’s warranted. Likewise, when you purchase stocks, it’s a good idea to set an exit point, based on the potential of the company. And when it reaches your target—unless your reevaluation of the stock indicates further gains—go ahead and take your profits and use your gains to buy your next winner. One strategy I like—if my new evaluation of the stock indicates greater gains ahead—is to cash in 50% of my shares, determine a new price target, and then leave the remaining 50% in place for the next wave of momentum.
You’ll find a selection of articles on the Wall Street’s Best website that cover these and other topics in more depth. And I’m always interested in hearing any additional suggestions for topics you want to discuss.
