Tips for smart investing in volatile markets
The key to being a successful investor isn't about predicting every market move — it's about building a thoughtful plan and sticking to it, even when emotions tempt you otherwise.
Investing always involves risk, including the potential loss of principal, and returns can fluctuate based on economic conditions. Your investment decisions should align with your personal goals, time horizon and risk tolerance.
Markets are rarely smooth: Expect and prepare for volatility
One of the most common misconceptions is that investing delivers steady, upward progress without interruptions. In reality, volatility is a normal part of the journey. A striking example occurred in early 2020 with the onset of the COVID-19 pandemic: From its peak on Feb. 12 to the low on March 23, the Dow Jones Industrial Average declined roughly 37% in just over a month. The speed and severity of that drop tested even seasoned investors. Yet the recovery was remarkably swift, with major U.S. indices reclaiming their pre-pandemic highs by August 2020 and continuing to advance in the years that followed.
This episode underscores a vital point: downturns can feel overwhelming in the moment, but history shows that remaining invested through periods of uncertainty often positions you to benefit from the eventual rebound. Rather than withdrawing entirely during declines, consider maintaining flexibility — perhaps rebalancing your portfolio or adding to positions at lower levels — while staying true to your long-term strategy.
Avoid the temptation to time the market
Trying to buy at bottoms and sell at tops is another frequent pitfall. It's an appealing idea but consistently executing it is extraordinarily difficult. Research consistently demonstrates that a significant portion of long-term returns comes from a handful of strong days, which are hard to predict and often follow periods of weakness. These “best days” rarely announce themselves in advance; they tend to occur amid uncertainty. Time in the market has historically outperformed attempts to time the market. A disciplined approach, such as regular contributions and dollar-cost averaging, helps capture those gains without the stress of perfect timing.
Align your portfolio with your true risk capacity
Another area where investors often stumble is constructing a portfolio that doesn’t match their actual risk tolerance. In times of economic uncertainty, many shift heavily toward low-risk assets like cash or short-term bonds for a sense of security. While this can feel protective short-term, it may impede the growth needed to meet your long term objectives. Investors need to be diligent in finding the right balance between preserving capital and allowing for meaningful appreciation.
Avoid emotional decision-making
Emotions are perhaps the greatest threat to investment success. Fear drives sales at market lows, while greed prompts buying at highs — both of which eat into returns. When volatility rises, having an objective third party, such as an adviser or a disciplined investment strategy, can provide reassurance and data-guidance to help you stay the course.
Use diversification to manage risk
Finally, never underestimate the power of diversification. In investing, this means spreading exposure across asset classes (stocks, bonds, alternatives, cash, etc.) and within them different sectors, geographies, and company sizes. A portfolio concentrated in a single industry — say, all technology — remains vulnerable to sector-specific downturns, whereas a broader mix tends to perform more steadily across varying conditions. Diversification doesn’t eliminate risk, but it can reduce the impact of any one adverse event.
Successful investing rewards patience and discipline to a personalized plan. Markets will continue to test us, but those who avoid these common pitfalls tend to achieve stronger outcomes over time.
• John P. Daly is the owner of Daly Investment Management LLC of Mount Prospect, a registered investment adviser specializing in wealth management and retirement planning. For more information, visit www.dalyinvestment.com.