Top Tips For Handling Stock Market Volatility
Here are five tips for managing stock market volatility:
1. Sell Some Of Your Stock
Reducing exposure is generally geared toward reducing concentration risk. In late-cycle or overvalued environments (which will depend on the analysis of the investor), trimming can build a greater cash/short-duration position for future opportunities.
At the same time, selling when markets fall is often one of the worst decisions long-term investors can make, as declining prices typically mean you’re getting more future earnings for each dollar invested.
2. Hedge Your Bets Through Diversification
True diversification means owning assets/asset classes/return streams that respond differently to growth, inflation, interest rates, and unique risks (e.g., geopolitical shocks).
Over the course of a lifetime, everyone’s favorite asset class will likely decline by 50–80% or more. Because all known information is already priced in, you can’t predict which one it will be.
What you can count on is that different asset classes do better in some environments and do poorly in others. The key is to balance them well to improve your return relative to your risk and so no single economic scenario can derail your entire portfolio.
For example, stocks do best when growth is above expectation and inflation is modest. Safe government bonds do best when growth and inflation come in lower than discounted. Commodities do better in a high-growth and high-inflation environment (and can even be the cause/partial cause of inflation). Cash does best when money and credit are tight.
3. Look For Bargains In The Market
Volatility dislocates prices from fundamentals. Strategic capital steps in when value becomes distorted.
But also recognize that markets are extremely competitive. Beating professional investors consistently is like trying to beat professional athletes at their game or beating casino games. Amateur investors carry a negative statistical edge built against them.
It’s important to prioritize diversification over tactical bets to reduce dependence on any one thing, and resist the illusion that market timing or picking winners is a sustainable edge.
4. Don’t Worry About Daily Swings
Obsessing over daily moves is like steering a ship by watching the waves. Step back: what matters is your portfolio’s durability over time.
If an asset yields 6% annually, that’s just ~0.02% per day. Daily market swings of stocks (for example) often exceed 1%, or 50x that.
For long-term investors, the day-to-day is noise, as are most weekly, monthly, and even quarterly moves. (The annual can be as well.) Long-term investors have to let the compounding engine run to get the intended results.
5. Keep Things In Perspective
Keep perspective by anchoring to your goals:
- What long-term return do you actually need to meet your objectives?
- How much portfolio volatility can you realistically live with and stay invested through?
- Is your strategy aligned with the broader purpose(s) your money is meant to serve?
This shifts the focus from abstract metrics and external happenings you don’t control to real-world utility and behavioral alignment, which in turn leads to better clarity and discipline.