Autumn is once again upon us and everything is feeling right and comfortable. The kids are back in school, we’re slipping back into old routines, the fall weather has been spectacular, and, quite happily, the stock market is up. What could be bad?
Well, unfortunately, a wee bit further south of us some other folks are also falling into some familiar routines. Specifically, the federal government is once again making noise about debt ceilings and a federal shutdown. Just like last year, the threat of a shutdown has added to and will continue to increase market volatility over the short term.
Granted, volatility is part of any market, especially the stock market. Measured in a number of different ways, volatility in and of itself it isn’t a bad thing. In fact, it’s part of what leads to a higher return for certain asset classes. However, the increased ups and downs in daily and weekly stock prices tend to lead to investor uncertainty prompting some to make irrational — and often poor —investment decisions.
Which is why in times of uncertainty it pays to be certain.
That is, it pays to have an investment strategy in place ahead of time with defined entry and exit points on your investments. By committing in advance to a plan, you can essentially ignore the media frenzy and avoid making reactionary decisions. Instead, you can use this time to make some calculated choices.
For example, if you are an investor with a plan and some cash available, there’s a good chance that any near term pullback in prices will provide an excellent entry point at prices lower than today. If you’re more conservative and more interested in locking in the gains of the US market over the past year, you can look at tightening up your stop loss points.
Most importantly, if you get stopped out of your holdings — the term used to describe when an investment reaches its stop loss point and is sold — or you fear the volatility is the start of the next big decline, you can commit to a new plan; a plan in which you reinvest after certain metrics have been met so you don’t miss the inevitable next rally.
While nothing is ever certain when it comes to forecasting the market, having a pre-determined plan for how you’ll respond in good times and bad is one certain way to avoid making reactionary and reckless moves.