Volatility: What Should Mutual Fund Investors Do?

Many mutual fund investors these days are afraid of the term volatility. The stock market’s wild swings – 1,000 points down one day, 900 points up another day – have many investors worried. New investors and Do It Yourself or DIY investors are the most affected. What should you do?

According to mutual fund advisors, existing investors should only reacquaint themselves with the term volatility. They say many investors are worried due to the phenomenal returns they have been making lately. These investors fear that fluctuations will steal their earnings. These investors should revisit their early lessons and it will reassure them, advisers say.

What lessons are they referring to? Well you must have heard
nausea that volatility is an integral part of stock market investing. You cannot avoid volatility if you invest in stocks for a very long time. In fact, not just volatility, you also need to be prepared for a bear market if you’re a long-time investor. Here we are not referring to daily up and down movements, but to persistent depressed market conditions.

Seasoned investors would remember that the markets only went down for months. In fact, market experts say that whenever the market witnesses a bull run like the recent past, a sharp market correction is very likely. Then the market gets nervous and swings wildly until there are strong clues.

When it comes to protecting your returns, taking the money out of the market and getting back in when the market is ready to take off is a safe bet, according to many nervous investors. Well, it can work for you if you can time the market well. If you remember your lessons that it is impossible to time the market, stick to your asset allocation and continue with your investment plan.

Also, you can remind yourself of the long-term returns you expect from your stock investment. Well, most of us take 12% returns when calculating long-term goals. So what about the 30% returns you made on your stock portfolio last year? Well, stock returns are not linear. One year you’ll make 50%, then you can make negative returns…that’s how you make a 12% annual return.

This brings us to new investors. Are you nervous because you are unfamiliar with stock investing? If so, educate yourself and try to make yourself understand the nature of stock investing. If you are still insomniac, you should review your investments. Make sure you have the ability to take risks when investing in stocks. Also ask yourself if you are willing to take risks. These steps would offer you clues.

Dolores W. Simon