As educative sites like Invezty.com have taught us, as an investor, you are in the game for the long term. Still, it’s okay to get worried about the price changes. The market can turn into a rollercoaster ride, and sometimes, the drops are hard to ignore. The question is: do you have the strategies to thrive when markets are anything but steady? 

Earlier this year, between February 1 and February 12, the Dow Jones Industrial Average saw two single-day drops of over 4%, a 2.54% loss, and afterward, a sharp 2.33% rebound—all in just a few days. 

If you zoomed in closer, the market seemed to be on a wild trampoline, jumping up and down hourly. This stomach-churning free up and down price bouncing, is volatility. It is the rapid, unpredictable price swings that make markets challenging to interpret. 

Causes of Volatility

Market volatility stems from a combination of factors. Post-COVID-19, we can generally say the market volatility has been driven by: 

  • Uneven Post-Pandemic Recovery: Some sectors, like the hospitality industry, were adversely affected by COVID-19. But some sectors are recovering faster than others, creating imbalances.
  • Inflation and Interest Rates: Inflation concerns and government interest rate decisions have not helped as governments balance their monetary policies. 
  • Geopolitical Tensions: Events like the Russia-Ukraine conflict have disrupted global supply chains and increased instability.
  • Sector-Specific Changes: Advancements in technology and the shift to renewable energy are driving fluctuations in related markets.

Top Investment Strategies for a Volatile Market

Match your investment to your time horizon

Your age should be more of a determining factor in your investing strategy than the current state of the market. If you're getting ready to retire in the next couple of years, volatility will seem scary, and you need to think about moving your nest egg into more stable investments like bonds or real estate. But, if you're 30 and just entering 30 years, you still have a few decades to ride the tides out. The volatility can work in your favor as it opens opportunities to buy quality assets at lower prices.

Simply put, invest in assets that align with your financial goals, risk tolerance, and investment time horizon. 

Spread your investments evenly over time

Invest a fixed amount at regular intervals, regardless of market conditions to reduce the impact of short-term volatility. This system is called cost averaging and it helps you avoid timing the market. The idea keeps your emotions in check and through compounding, steadily grows your investments over time.

If you consistently invest, you buy more shares when prices are low and fewer when they’re high, potentially lowering your average cost over time. It also smooths out market fluctuations and encourages you to build wealth in the long term. 

Diversify your investment

“Don’t put all your eggs in one basket,” we are told. The same applies to investments, especially during market uncertainties. Inevitably some assets will underperform. By spreading your investments across different asset classes, industries, and even geographic regions, you reduce the risk of a single market event wiping your entire portfolio. 

Diversification is like insurance as it balances off your portfolio. For example, if your stocks are struggling due to market turbulence, your money in bonds or real estate might provide the stability you need. Similarly, holding a mix of domestic and international assets can protect you from localized economic shocks.

An effectively diversified portfolio mixes growth-focused assets for long-term gains and stable assets that cushion you during downturns. This could include equities, fixed income, real estate, and, sometimes, alternative investments like commodities or gold.

Mistakes to Avoid in a Volatile Market 

Panic selling

Don’t let a few runs of losses lead you to panic. Maintain a positive outlook The market trajectory over the years, says it's always improving. In between there may be brief ups and downs, like the down periods of 2008-2009, but the market always recovers. Take a leap of faith and let things play out. It is going to be just fine.

Timing the market

While it's tempting to time the market when it spikes and falls, don't. As we’ve already said, implementing cost-averaging techniques hedges you against risk. You’ll not time the market, per se. Your goal is to invest consistently a fixed sum at both peaks and valleys. Your assumption should be that everything will eventually even out.

Checking the market

Constantly checking stock tickers and watching the trading charts isn’t psychologically healthy. It becomes addicting and leads to constant anxiety and a rollercoaster of emotions. Avoid it. You are an investor, not a day trader, so the ups and downs shouldn’t bother you. Check in every few days, though, just to see how your portfolio is doing. But don't let it consume you.

Conclusion

Investing is a long game. You have time to recover from short-term losses, so there's no need to fret when the market plummets. Smart investing principles take periods of volatility into account and the best thing you can do is remain calm, steady, and pragmatic. But it’s also worth revisiting your portfolio regularly. Markets change, and so do your goals. What worked a few years ago might not be as effective today. Rebalancing ensures that your investments align with your strategy, even as the market moves.