Dealing with uncertainty is an unavoidable part of investing. That's why a lot of people say "hindsight is always 20/20."
While there are ways to educate yourself and make informed decisions, no one can predict with 100% accuracy what will happen to their money when they invest.
At times, the unpredictability may worsen due to unexpected news and big market changes. During periods of heightened uncertainty, there are things you can do to stay grounded while investing.
1. Be informed
Get a better understanding of the situation that’s causing the uncertainty. This will give you clarity and time to think about your next step instead of making impulsive choices based on fear or panic.
Remember that you don’t have to act on the information you learned right away, if making a move is your decision. Find out first whether your investments might actually be affected.
2. Assess the impact
Changes in the market or economy could affect different industries and investments in different ways.
Let’s take the recent global pandemic as an example. Though businesses in travel or hospitality struggled, some technology and e-commerce companies did well.
To evaluate what a major event might mean for you, ask the following questions:
- Is the situation as bad as people say it is?
- Which companies or industries are affected?
- Would it have a big, lasting effect on the entire economy?
You can then assess the impact on specific investments in your portfolio. This will allow you to plan an appropriate response if necessary.
3. Plan, don’t panic
When everyone else seems to be selling off investments, it can be tempting to follow the herd. However, you should remember that your situation and goals differ from those of others, and so you don’t automatically have to do what they do.
Instead, you should do what makes the most sense for you and your investments. Here’s how you can prepare for the worst without taking on unnecessary risk:
- Follow your strategy
How you’ll react to market changes should depend on your investing approach. Short-term investors, for example, tend to look for opportunities to profit during increased volatility.
If you’re investing for the long haul (like preparing for retirement), it’s ideal to not focus too much on short-term market drops.
What matters most for your situation is how your investments will perform in the long run. You can continue following your strategy if it’s still aligned with your needs and goals.
Sticking to your strategy will help you clear out the noise and take emotions out of your decision-making.
- Review your portfolio
Heightened uncertainty can serve as a reminder to check on your portfolio. Is it still properly diversified or are there are gaps you can address?
There may be an opportunity to rebalance or put money in relatively safer investments if you feel that your portfolio could use the added stability.
- Keep some money in cash
Negative events also highlight the importance of being prepared for emergencies. Unexpected events are the reason why you must build an emergency fund before you invest.
It ensures your needs are properly covered in case the worst happens. You won’t need to sell investments prematurely, potentially at a loss. You’ll also have the flexibility to wait for your down investments to possibly recover.
Aside from having emergency savings, it’s also advisable to keep cash and highly liquid assets in your portfolio.
This can keep you from cashing out of less liquid investments in case you want to act on opportunities or need to move money around.
