Are You Prepared to Handle Market Instability?

It has been said there are only two certainties in life – death and taxes. If you invest in the equity markets you quickly learn there is a third certainty, and that’s market volatility. Investing is not for the faint of heart. It’s a rollercoaster ride with alternating ups and downs.

We would all like to believe our investment decisions are, for the most part, thoughtful and rational. Unfortunately, reason often goes out the window during periods of market volatility and our decisions are driven more by emotion. This may not be a smart investment strategy.

Rules to Help Deal with Market Volatility

These basic rules may help you avoid overreacting to volatility and stay on track with your financial goals.

• Stay calm: Periods of volatility produce daily headlines that can shake the confidence of any investor. Take a step back and remove yourself from the crisis of the day. Panic may lead to bad decisions. Stay calm, consult with your financial advisor and develop a short-term plan to ride out the volatility.
• Don’t jump in and out of the market: Trying to time the market is usually a mistake. The experts can’t do it and chances are neither can you. History has shown the equity market delivers the best results over time. And the biggest gains usually occur in the early days of a recovery. So avoid the temptation to pull out of the market entirely when volatility strikes.
• Maintain a diversified portfolio: In other words, don’t put all your eggs in one basket. Spread your money among the three major asset classes – stocks, bonds and cash. Asset allocation is the best way to reduce your investment risk during periods of volatility. If one asset class is taking a pounding – such as the stock market – you may be able to offset those losses to some degree with better returns in the other asset classes.
• Invest on a regular basis: Markets are going to rise and fall over any given time period. By making systematic investments – say, on a monthly or bi-monthly basis – you mitigate the risk associated with fluctuating prices. Through this process called dollar cost averaging,* you invest throughout the market’s various cycles, buying more shares when the market is low and less when it is high. Over time, this may reduce the average cost per share for each dollar you invest.
  
  One of the big advantages of dollar cost averaging is it takes the guesswork out of which way the market is going. Keep in mind, however, that dollar cost averaging does not assure a profit or protect against a loss in a declining environment.

Develop A Plan And Stick To It

Maintaining a steady course during volatile times isn’t easy. It takes a fair amount of courage and you have to keep your emotions in check. But the volatility will pass. Develop a plan to deal with these unsettling periods, based on your tolerance for risk, and stick to it.

* Dollar cost averaging involves continuous investing, regardless of fluctuating price levels. Investors should consider their financial ability to continue purchasing units/shares during periods of fluctuating prices. DCA does not ensure a profit or protect against loss in a declining market environment.

Diversification and asset allocation do not assure or guarantee better performance and cannot eliminate the risk of investment loss.

This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.

"The Hartford" is The Hartford Financial Services Group, Inc. and its subsidiaries.

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