Thursday, December 11, 2008

3 Investing Tips for Volatile Markets

With stock markets getting crushed here are 3 tips on investing during volatile markets:

To understand this concept more easily, we first need to define the meaning of diversification. Diversification is an investment technique that uses many varied investments within a single portfolio. The idea behind it is that a portfolio of different kinds of investments may, on average, yield higher returns and pose a lower risk than a single investment. Diversification tries to smooth out volatility in a portfolio caused by market, interest rate, currency and geopolitical risks. In laymen’s terms, don’t put all your eggs in one basket. It’s important to remember that diversification does not assure against a loss.

If you include bonds or FDIC-insured Certificates of Deposit (CDs) in your stock portfolio, it may take away some of the volatility of the portfolio, allowing for potentially, more stable returns over the long run.

Don’t Panic
Keep you eyes glued to your long-term goals. It’s important to remember that markets go up and down, and if you made a financial plan, it would have taken this type of market volatility into account. The worst thing you can do as an investor is panic and sell everything and then wait for the market to recover. The market tends to recover very quickly. Large market gains often come about in quick and unpredictable spurts, and missing just a few days of strong market returns can substantially erode long-term performance. Remember the famous investing principle of buying low and selling high. Investors who panic often end up selling low.

The third principle is for investors to update or rebalance their investment portfolios. Rebalancing is necessary for two main reasons. First of all, it keeps your asset allocation in line with your risk level and, secondly, it keeps your portfolio in line with both your short- and long-term goals and needs.

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