When markets shift, particularly when they drop quickly, it can be hard not to react. But history shows you will more likely achieve your long-term investment goals if you have a plan and stick to it through all types of market conditions. This may sound easy, but investors have been put to the test in recent times.
Veering off course from a carefully thought-out plan can have long-reaching consequences. It can turn a temporary loss of confidence into a realized loss on an investment portfolio.
1. Maintain discipline
Making dramatic portfolio changes, like moving in and out of the markets, can have a negative impact on achieving your long-term investment goals. Why change your plan? You may have created your plan with an accredited financial advisor whose job it is to create a long-term financial plan. Don't change that plan because the market goes down. Also, the market going down 20% doesn't mean that your portfolio goes down 20%. If there was any cushion of safety in the plan, your portfolio may only see a slight 5% to 10% decrease. You can then use that time to put more money into your portfolio.
2. Diversify your portfolio
Diversification, where you hold a mix of different kinds of investments, has long been considered the golden rule of investing. It remains key to reducing portfolio volatility and risk.
A financial planner can help you diversify your portfolio of investments. An example could be by having equities (Stocks), bonds, some ETFs, investments in Canada, USA, and global markets, also some held in CAD and USD. But selecting the best securities to hold in each sector or industry is a great way to diversify.
3. Regularly rebalance
Market swings – even smaller ones – can often cause a shift in the mix of investments you hold in your portfolio (also known as portfolio drift). This can lead to a very different investment experience than you originally intended. This is why it is important to rebalance your portfolio at set intervals. It could be once every 3 months, 6 months, or 1 year.
Also, maybe your investment objectives have change and you now need to make changes to your portfolio. Maybe you just had a baby, or you would like to help your adult children buy their first home. Things change, and it's okay if your portfolio does too.
4. Use time to your advantage
One of the keys to successful investing is to start as early as possible. That’s because time is one of the most powerful elements in your investment plan. If you have a longer time horizon, you should invest as soon as possible.
5. Invest regularly
Investing a fixed amount on a regular basis helps keep your investment plan on track through all types of market conditions. This gives you the opportunity to buy low during market swings and 'ride the wave' as your investments move up. You can also take advantage of the investment strategy called 'dollar cost averaging' where you invest into your portfolio on a regular basis vs one large lumpsum once or a few times a year.
