We’re in the midst of an ongoing global market correction, and no one knows for sure when the decline will stop or what kind of recovery will follow.
Through 2022 so far, leading global stock market benchmark indexes are broadly down, some 20 per cent or more. Making matters worse, strong economic headwinds stemming from a mix of rising interest rates, global conflict, and political instability have many fearing the worst is yet to come in the year ahead.
If you’ve watched the value of your investment portfolio take a tumble in recent months, wiping out most or all of last year’s gains, you might be wondering what to do to protect your savings through this difficult and uncertain period.
In short, the best approach is to stick to your plan and not panic, although there’s obviously a little more to it than that. Here’s an explanation of how and why to keep your head when market volatility strikes.
Keep things in perspective
It’s not always easy to ignore the emotions stirred by daily news of market decline and investment loss. Remember that it takes time, perhaps several years or more, to truly measure the return on an investment. Likewise, rash decisions based on reactions to market dips are a sure-fire way to lock in losses. Unless you’re planning on withdrawing cash from your savings in the short to near term, keep a long-term view of your savings goals.
If you don’t already have a solid investment plan, now is the time to get one. Determine your needs, goals, and timelines, and figure out how to get there. Having a plan is a great way to provide the resolve you may need to stick with things when markets are going up and down.
Diversify your savings, and re-balance periodically
Some declines affect the entire market while others are sector-specific. Diversifying your savings between different types of investments, and between different sectors of the market, is a reliable way to protect against the potential impacts of volatility.
At least once a year, and even more often if possible, take stock of your holdings and consider whether the mix of assets needs adjusting to help provide better balance and diversification.
Don’t stop investing
Part of sticking with the plan and being in it for the long haul is about continuing to invest amid volatile periods, recognizing that you’ll eventually be rewarded with gains over time.
It’s the principle of dollar cost averaging, where investing regular amounts over time serves to reduce volatility by taking advantage of the opportunity to buy more when prices are low while limiting purchases when prices are high. Often, investors who held steady during a recession or even invested more to take advantage of lower costs come out ahead in the long run.
You can’t really count on cash
Cash is typically viewed as a safe haven for your money because it’s kept away from the potential volatility of the markets. Still, savings kept as cash aren’t entirely ‘safe,’ either.
The reason? Cash savings are subject to the potentially volatile threat of inflation, which eats away at the purchasing power of your money while it idles out of the market. A high inflation scenario such as the one we’re currently experiencing only accelerates the problem.
If you’re hoarding cash, you may lose less to inflation than to a market drop but don’t be fooled into thinking your money is truly ‘protected’ from losing value.