There’s a lot of uncertainty going around, and that means you can expect more stock market volatility.
Last week, a number of investors were shocked when the Federal Reserve decided not to taper its asset purchase program. With the announcement came the reasoning behind the policy decision, which basically amounts to: We need to see more evidence that the economic recovery is sustainable.
Part of the reason that the taper was put off, I think, is due to concerns about what’s next for the economy as the House and the Senate move toward a showdown over the budget, the debt ceiling, and Obamacare.
With this uncertainty setting in, and political fights coming, there’s a good chance that we will see more stock market volatility. Are you ready for the roller coaster ride?
Can You Keep Calm in the Face of Stock Market Volatility?
One of the first things you need to do is prepare yourself to keep calm in the face of stock market volatility. With the Dow so high, and with stocks seeing such dramatic gains recently, many expect some sort of sell off soon. It doesn’t mean a huge crash is imminent, but there is likely to be some difficulty ahead.
Can you keep calm in this situation?
It’s important not to let fear rule your investing decisions in these situations. If you have an investing plan, you need to stick with it. While there are plenty of legitimate reasons to sell an asset, the fact that everyone around you is panicking is not a good reason to unload your stock shares.
Prepare to Take Advantage of Opportunities
Too many people focus exclusively on the downsides associated with a stock market crash, and neglect the opportunities. Even if there isn’t a huge crash, there are usually opportunities with stock market volatility.
At the very least, a dip in the market means that, if you use dollar cost averaging as part of a regular investment plan, you end up buying shares at a lower price. Down the road, this can be helpful since you can see significant gains down the road as your discount-price investment recovers and appreciates.
It’s also possible to have money in readiness to take advantage of other opportunities. During volatile times, it’s not uncommon to see a stock drop one day, only to rise again in the next couple of days. If you are a more adventurous type (I’m a boring investor), this provides opportunities for you to buy on the dips and sell on the short-lived recoveries.
If you have a little spare cash lying about, you can add it to your investment account, ready to put it into action as soon as you spot a good deal. Of course, this is a bit of a risky approach, but with “fun” money, it can be one way to take advantage of stock market volatility.
At the very least, you can look into the VIX. If you think the political climate, and the uncertainty associated with it, will result in more market volatility, an investment in the VIX might make sense.
Examine your risk tolerance, and think about how you think things are likely to play out. Rather than losing your cool over stock market volatility, consider the possibilities. At the very least, there’s a good chance that sticking with your investment plan will benefit you in the long run — unless you think that financial apocalypse is right around the corner.
What do you think? How do you respond to stock market volatility?