Desk with graphs on three monitors

How do you react when you see news headlines talking about the latest ups or downs of the stock market?

According to a new Ally Invest customer survey, more than half of investors take market volatility in stride, holding onto their investments when large market disruptions occur. And significantly, 41% take advantage of market inflections to buy and add to their investment portfolio.

Big market swings don’t seem to induce the same sense of panic witnessed just a few years ago, but they still give investors a lot to think about. We spoke with Lule Demmissie (during her tenure as president of Ally Invest) about what investors can do to help them more confidently ride out times of market disruptions. 

Lule DemmissieWhen significant events disrupt the market, what should investors keep in mind?

Investors have gotten used to the idea of volatility becoming the new norm. But even though you know it’s coming, it can still be stressful. The key is bolstering and maintaining confidence for when that volatility sets in. There are several tactics you can take to make that possible. One is creating a layer of savings protection and not over extending yourself in the market. Building in a bit of cushion will help you fight the impulse to pull out when the market turns downwards. Second, you can use automated savings vehicles that allow you to do things in an out-of-sight, out-of-mind way. Using things like dividend reinvestments or DRIPs and auto deposits will give you the means of accumulating wealth without feeling any initial pain and will put you in a better position to weather different market conditions.

Are there any tried-and-true steps you should take when disruption hits?

If you don’t check your portfolio regularly, a market disruption may be an opportunity to take a closer look at what you are invested in. Long-term investors may view a disruption as an opportunity to invest more and take advantage of dollar cost averaging, a strategy where you invest a fixed amount at regular intervals, sometimes buying at a higher price and other times, at a lower price.

A market disruption also gives you additional insight into how your portfolio performs during volatile times. It serves as a stress test for your portfolio. If the volatility makes you feel uneasy, it might be an opportunity for you to reduce the risk within your portfolio so it doesn’t experience significant swings during volatile times.

Are there certain sectors or types of investments people need to be more cautious about during market disruption?

Depending on your portfolio construction, certain sectors that you’re heavily weighted in or other types of investments could become volatile during the market disruption. If you have a diversified portfolio spread across different sectors, you may see certain parts of it perform better than others simply because the market disruption didn’t affect them.

For example, with the recent trade wars, the market took into account how the tariffs may impact certain companies and even entire sectors. So it’s no surprise that as negotiations took place to determine how the tariffs might impact the earnings of certain companies, their respective sectors became more volatile.

What opportunities, if any, does market disruption create for investors? 

Rebalancing opportunities may present themselves during market disruption and give you the opportunity to invest in areas that are experiencing a short-term decline. If the market is declining due to the disruption and you employ dollar cost averaging, you’ll have opportunities to purchase securities at a lower price, which can help with your long-term returns.

Do investors of different ages or at different stages need to think about market disruption differently?

Different ages and stages of one’s financial journey can cause different reactions to market disruption. If you’re closer to retirement, you may be invested in less volatile securities that may not be as impacted by a market disruption. But if you’re earlier in your financial journey, you might have a more aggressive portfolio with a higher risk level that is more prone to experiencing market volatility.

Market disruption also presents opportunities for traders. For instance, as volatility increases during market disruption, there may be strategies that can be deployed to try and capitalize on the volatility. For example, self-directed traders can invest in options to help hedge against downward pressure.

Discussion questions:

  • How do you react to market volatility?
  • Have you used dollar cost averaging as part of your investment strategy?
  • What types of trading moves are you comfortable making during times of market volatility?