7 Reasons to Invest When the Market Is Volatile
February is over but it feels like we continue to be stuck in a version of the classic Bill Murray movie Groundhog Day. Economic indicators are overwhelmingly – although not 100% – positive. Even so, we seem to be stuck in neutral. Sentiment continues to be lukewarm, causing investors to be skittish and keeping the market volatile.
It’s not breaking news that investing in the stock market inherently involves risks. But it is during times of market volatility that the potential for significant gains becomes more pronounced.
While the uncertainty and unpredictability of a volatile market may cause many to shy away from investing, it is important to recognize the potential advantage of embracing opportunities right now.
Here are seven reasons to invest when the market is volatile, emphasizing the long-term benefits of making sound investment decisions amidst market fluctuations.
1. Capitalize on discounted asset prices
Market volatility often causes overreactions and irrational investor behavior, leading to price spikes and drops. Such downturns present a unique opportunity for investors to purchase quality stocks and assets at discounted prices. Investors with the patience and discipline to weather these short-term market fluctuations can significantly benefit by buying bargains that can rebound when market conditions stabilize.
2. Take advantage of dollar-cost averaging
Volatile markets are perfect for dollar-cost averaging (DCA). DCA is an investing strategy that entails investing a fixed amount of money at regular intervals, regardless of market conditions. When the market is unstable, DCA allows people to buy more shares at lower prices, thereby reducing the average cost per share over time. Rather than making one big purchase all at once, DCA involves smaller, consistent investments regardless of the short-term ups and downs in price. The stocks bought during the dips ultimately yield greater returns when the market recovers, further reinforcing the advantages of investing during volatile periods.
3. Probability of higher future returns
There’s a substantial body of research, not to mention historical data, showing that even though volatility can appear daunting in the short term, it tends to be accompanied by higher potential for long-term returns. Strong market downturns have generally been followed by strong rebounds, leading to substantial wins for patient investors. Investors willing to endure these short-term uncertainties can benefit from the subsequent growth potential that emerges during calmer market conditions.
4. Diversify and manage your risk
Volatility highlights the importance of diversification and risk management in investment portfolios. In turbulent markets, the values of various assets fluctuate independently. This creates an opportunity for investors to rebalance their portfolios by allocating resources to the assets or sectors that are more stable or undervalued. By diversifying investments across different asset classes and regions, you ensure your portfolio is better equipped to withstand market volatility and mitigate potential losses.
5. Learn and build resilience
Investing during market volatility provides a unique opportunity to gain practical experience and resilience. It allows you to see firsthand how markets react to various events and to analyze patterns and trends. You gain an understanding of market dynamics, enabling you to make more informed investment decisions. By embracing volatility, investors grow more resilient and less swayed by short-term market fluctuations.
6. Don’t try to time the market
People will claim they can time the market or that they’re right most of the time. But consider this – if they really could do that, why haven’t they? We’d all know about them because they’d be uber-wealthy. The successful investors you know about have made a lot of money but they didn’t do it by timing the market. Studies show that even experienced investment professionals struggle to consistently time market movements accurately. Rather than trying to outsmart the market, a long-term perspective focused on patience, disciplined investing, and diversification tends to yield better results. By investing during volatile periods, individuals are less likely to fall prey to impulsive decisions driven by market sentiment and instead rely on a strategic investment approach.
7. Create your long-term investment strategy
Volatility will help you refine and strengthen your long-term investment strategy. By gaining exposure to both prosperous and challenging market conditions, you can identify your risk tolerance and find asset allocations that align with your financial goals and objectives. Effective financial planning, including an assessment of your risk appetite and diversification strategies, during volatile periods can lay the foundation for a resilient and successful investment approach.
While investing during a volatile market may seem counterintuitive to some, it is in such periods that the most fruitful investment opportunities arise. By capitalizing on discounted asset prices, employing dollar-cost averaging, and recognizing the potential for higher future returns, you can position yourself to benefit from the eventual rebound that often follows periods of market instability.
It is important to remember that long-term investment success relies on a combination of patience, discipline, diversification, and adherence to a sound investment strategy. By embracing market volatility rather than avoiding it, you not only safeguard your financial future but also reap the potential rewards of this opportunistic investing approach.
Noteworthy in February
Michael Brush, Chief Analyst of Cabot Cannabis Investor is off to a great start this year with an average YTD return of +25.8% vs ~7% for the S&P 500 over the same timeframe.
Our value investing expert Bruce Kaser had a nice win this past month in his Cabot Value Investor when he sold ALSN following a positive earnings report for a +82% total return in less than 2 years.
On the options trading side, Jacob Mintz delivered a huge +279% profit to members of his Jacob’s Private Circle service in 6 months, when he closed the final piece of his VRT Bull Call Spread.
For your investing success,
Ed Coburn
President & Publisher
Cabot Wealth Network
P.S. New Best Stocks Report – Get It Free Now
We have just released 5 Best Stocks to Buy in March, featuring five strong momentum stocks to buy right now. This concise report is by Mike Cintolo, our Chief Investment Strategist and Chief Analyst of Cabot Top Ten Trader. You can download the report for free.
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