Investing during market volatility can be difficult. Should you use cash? What are the best investments to make during a market downturn? Is now a good time to think about tax-loss harvesting or buying the dip? If you're not sure whether you should do something, you probably shouldn't. Staying the course in the face of market volatility usually pays off for the patient investor.
Everyone enjoys a good sale, except when it occurs in the financial markets. Fear of short-term volatility can cause investors to postpone investing money that they would otherwise have put to work.
For long-term investors, whether it's a good time to invest should have little to do with current market conditions. If you have extra cash, a long time horizon, and you've considered what else you could do with it (such as pay off high-interest debt), it's probably a good idea to invest it in a diversified portfolio. The ability to purchase assets at a lower cost as a result of market volatility is an added benefit. If you're concerned about volatile markets, consider dollar-cost averaging rather than investing all at once.
Looking for the lowest price is not an investment strategy. There are no smoke signals to be found. There is no all-clear sign. Investing is about putting money into the market over time, not about timing the market. Buying low and selling high may sound appealing, but markets rise far more than they fall over time. When stocks fall, the most common mistake investors make is to stop investing and sell to cash. Because it's nearly impossible to perfectly (or even adequately) time your exit and re-entry from the market. Investors frequently focus on selling and pay little attention to when they put money back into the market. This is a huge blunder.
Diversification isn't a panacea, but it's the best tool investors have for protecting their portfolio from volatile markets. Bonds, at their most basic, can provide stability and income to a portfolio. However, this is only the tip of the iceberg. Different asset classes react differently to market conditions. Additionally, the correlation and diversification properties of an asset class are important in managing market volatility.
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