“Keep calm, keep investing” is an expression often used to emphasise the importance of staying patient and maintaining a long-term perspective when investing in the financial market. It conveys the idea that short-term market fluctuations and volatility should not deter investors from staying committed to their investment strategies. Therefore, if you are an investor who has allowed the fear of losing your money — due to market volatility — to affect your desire to invest, or if said fear has kept you wading only in the shallow end of the investment pool, here are some things you need to bear in mind:

What Is Market Volatility?

Asset prices, including stock prices, fluctuate — that is, they go up and down a little bit every day — but do not be alarmed, this is normal. However, it is usually large swings in asset prices that alarm investors the most, particularly when there are significant declines. Volatility refers to large and unpredictable movements in asset prices. Volatility occurs when a market or security such as stocks, bonds, commodities or currencies experience periods of unpredictable, and sometimes sharp, price movements. This can cause investors to shy away from riskier assets, such as stocks, because of the uncertainty in price, even though they offer the potential for higher returns over time. Nevertheless it is important, particularly for the long-term investor, to understand that sometimes markets do become volatile in response to adverse economic or political developments, etc. The only way to avoid this would be to not invest and only keep your money in cash in a bank somewhere. However, this will not prove beneficial to your long-term goals.

How To Remain Calm During Volatility

Remaining calm during market volatility can be challenging but it is crucial for making rational investment decisions and staying focused on your long-term financial goals.

1. Volatility Comes and Goes: Every beginner investor needs to be guided by history and to begin their investment journey with an understanding that market volatility is inevitable. Nevertheless, try to remain calm. Stay focused on your financial goals and build a long-term plan.

Notably, the stock market has overcome many obstacles, from the Great Recession and the market crash of 1987 to 9/11. Additionally, history has shown that no matter what challenges the global economy has faced, stock markets typically recover from downturns and go on to deliver impressive returns over the long term. Moreover, even markets that saw significant declines as recently as three years ago — at the onset of COVID-19 and other economic headwinds — have rebounded above pre-pandemic levels. Consequently, by leaving your money invested in the stock market you increase the chances of it growing and building substantial wealth for your future.

2. Portfolio Diversification Is Key: Investors can limit potential losses by diversifying their portfolios. In times of market volatility having all your money tied up in one asset class is not prudent. The goal of a diversified portfolio is to participate in the best-performing asset classes. Allocating your money across various asset classes like equities, bonds, property, and even some cash — over various sectors, industries, and geographical market environments — can reduce the impact of downswings in your portfolio. The fact is, different asset classes perform differently at times, depending on what the market conditions are. Equities tend to offer the best returns over the long term but are also more volatile in the short run. Cash and government bonds, often referred to as safe haven assets, typically offer lower returns but tend to fare better than stocks in shock events. Holding a mix of assets that respond differently to market events can provide a buffer against short-term weakness. Diversification can help reduce the impact of volatility on your overall portfolio and provide a more stable investment experience.

3. Stop Timing the Market: With great risk might come great reward — and perhaps great losses. It is easy to get caught up in monitoring the highs and lows of the market, however it is time — not timing — that matters most. Trying to get in or out of the market at a particular time can backfire, and it is nearly impossible to do it successfully. Remember, markets move in cycles so it’s best to avoid the urge to make impulsive moves. Remaining invested throughout turbulent times will prepare you for a better recovery after the downturn. If you have a sound investing strategy there is no reason to abandon it during a period of volatility.

4. Keep Enough Cash Reserves: A drop in the value of your investments can be very unsettling for a beginner investor, whose first instinct often is to sell and run to prevent further losses. However, if and when your investments fall in value due to market volatility it is only a real loss if you withdraw your money — let this sink in for a minute. Having a cash buffer of at least six months’ worth of your normal expenditure is a good idea while investing so that you feel less tempted to encash any of your investments, leaving them to rebuild instead. Notably, if you withdraw your capital before you should, you could miss out on future growth; it is even worse if you embark on the very futile act of trying to time the market so as to jump back in when you think the time is right. You can end up in a worse position; furthermore, you might not be able to buy back into the market later at a lower price. Therefore, having a cash cushion coupled with a disciplined investment strategy can change your perspective on market volatility.

5. Consider Re-balancing Your Portfolio: Big market swings can cause your portfolio to be thrown off balance. Look at your portfolio and decide if it leans too heavily towards stocks, which could leave you worse off than before. You might decide to go with a higher percentage of bonds instead, especially if you have a long-time horizon. Overall, market fluctuations can cause your portfolio to deviate from your target allocation, however re-balancing helps you stay aligned with your long-term investment strategy. Of note, while re-balancing is essential, avoid doing it excessively. Frequent re-balancing can lead to higher transaction costs and may not provide significant benefits, especially in highly volatile markets.

Investing is not a sprint; it is a marathon, it is a commitment. The minimum time frame you should be looking at if you decide to invest, especially in assets such as stocks, is five years; however, a sound investment strategy will look at least 15 years ahead. Have faith in your plan, especially if you had worked with an authorised financial advisor to formulate it and your investment strategy is sound. Volatility and investment go hand in hand; and although market volatility can be unnerving it is a normal part of investing so ride out the storm. This isn’t to say that there won’t be times when you will need to make tactical changes to your investment portfolio based on changes in your circumstances and changes in economic conditions. However, staying calm and sticking to a well-considered investment strategy can help you navigate challenging market conditions and stay on track toward achieving your financial goals, instead of rushing to liquidate your investments when markets become uncertain. If you have specific concerns or questions about your investments, consider consulting with a financial advisor who can provide guidance tailored to your situation.