For investors, market volatility can be a painful thing, particularly on the down days. No one likes to see the value of their portfolio go down, but every downturn comes with potential opportunities. However, as emotions can run high, along with volatility, it is important to maintain portfolio discipline, staying with your long-term game plan, as history suggests that the long-term trend is likely to be positive.
One investment strategy that can benefit from market volatility is dollar-cost-averaging, wherein an investor commits a set dollar amount to their portfolio each month. Thus, during a weak market, the same number of dollars buys more shares, and less shares in a strong market.
A parallel strategy, that can be beneficial during periods of market volatility, is rebalancing. Use weak markets to increase participation in underperforming portions of your portfolio and stronger markets to trim the outperformers.
Both dollar-cost-averaging and rebalancing can help an investor to “buy low”, when investments are defectively on sale. This is a good method for countering the natural tendency to do just the opposite. Try to avoid the temptation to attempt market timing. History suggests that this is not likely to be successful over the long term.
Market reversals can also provide an opportunity to engage in tax-loss-harvesting, by taking portfolio losses, reinvesting in similar securities and thus booking a loss for your tax returns while preserving your overall portfolio objectives.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA