After the roller-coaster ride of 2011, stock markets worldwide have turned in a more settled performance so far this year. However, many analysts predict volatility will return soon as the outlook for Europe and the United States starts to fluctuate.
Stock market volatility often results from economic uncertainty. When investors believe the economy is on the upswing, strong buying sentiment tends to send prices higher. But an adverse geopolitical event or economic trend can spark a wave of selling that sends prices down fast.
Long-term investors generally need to try not to react to short-term market fluctuations. And while it may be prudent to rebalance more often when conditions are volatile, the best way to cope is to develop a diversified portfolio with a mix of assets that tend not to move in sync over longer periods. Investing in bonds, equities, and alternative assets may smooth out the ups and downs of portfolio as a whole. But it’s important to diversify within asset classes, too—with growth and value stocks; large-, mid-, and small-cap stocks; and domestic, international, and emerging-markets stocks.
It’s easier than ever to achieve such diversity, because mutual funds and exchange-traded funds have made hedge-fund strategies and foreign stocks more accessible. We can guide you in choosing the right investment vehicles to match your goals and risk tolerance.