The stock market has been quite volatile over the last several years, and with a presidential election on the horizon, that volatility is expected to continue — and possibly become more extreme in the months ahead.
For risk-averse investors, volatility can be discouraging, especially during periods of dramatic inflation. But this doesn’t mean there are not opportunities to invest and find meaningful growth.
I recently had the opportunity to speak with Fulton Brock, president of Brock Asset Management, about what risk-averse investors can do to feel more confident in investing opportunities and outcomes.
1. Focus on the Long-Term
One of the first pieces of advice from Brock is to focus on long-term outcomes. “Far too many investors get caught up in the day-to-day ups and downs of the market, which can feel extremely volatile,” he says.
“But if you look at the long-term outcomes for the market as a whole, a different picture emerges with respect to recessions and volatility. Risk-averse investors can alleviate many concerns by focusing on long-term growth potential and the goals they hope to accomplish.”
For instance, as a report from NerdWallet notes, the average stock market return for the last century has been roughly 10% per year. While this can vary from year to year (and there are years with declines), significant gains can happen for those who invest with a long-term focus.
2. Take Advantage of Dollar-Cost Averaging
Paired with a long-term focus on investing, Brock encourages risk-averse investors to use dollar-cost averaging to guide their investment strategy. “With dollar-cost averaging, you invest the same amount of cash at regular intervals — such as once a month — regardless of stock prices,” Brock explains.
“With this investing method, you’re not concerned about timing the market. Instead, the focus is on making regular investments which will lead to long-term growth whether the market goes up or down. This takes a lot of the stress and risk out of investing, as dollar-cost averaging ensures that you are putting your money to work by taking advantage of growth opportunities.”
Brock notes that this investment strategy can be particularly powerful when planning for retirement, giving investors a simple and relatively low-risk course to save for their future.
3. Invest in Diversified Options Like Mutual Funds and ETFs
No one can predict the market with perfect accuracy, especially when it comes to individual stocks. Investing in a single company can be risky since the portfolio value is intrinsically linked to that company’s performance. However, investors can reduce their risk by investing in a mutual fund or Exchange-traded fund (ETF).
“Mutual funds are actively managed, with fund managers deciding how assets are allocated within the fund, and which stocks and securities should be a part of the fund. ETFs, on the other hand, are passively managed, as they typically track a particular market sector or index,” Brock explains. “Diversified investments such as these help ensure that even if a single company’s stock declines, growth in other stocks can offset potential losses, which reduces risk.”
4. Maintain Cash Reserves
While investing cash in the stock market can lead to larger gains than keeping that money in a checking or savings account, it is still worthwhile to maintain cash reserves for other needs. Generally speaking, it is recommended that households keep three to six months’ worth of savings in a high-yield savings account.
A high-yield savings account generates some interest growth, while still ensuring that an adequate emergency fund is available to cover situations such as job loss or a medical incident.
These cash reserves can also be used to fund additional investment opportunities. While risk-averse investors typically try to avoid timing the market, if a potential opportunity during a market downturn arises, having the extra cash available allows the flexibility to take advantage of a lower buy-in. Even if you don’t end up investing, your cash reserves will offset any potential short-term losses linked to your investments.
5. Educate Yourself
“Education is your best friend when it comes to understanding the risks and rewards of investing,” Brock says. “You shouldn’t invest in a company just because they’re currently popular. Research what they do, as well as what their cash position, debt margin and business fundamentals are. When you better understand the company’s fundamentals, you are better positioned to identify stocks with the best long-term potential.”
Aside from doing additional research into the companies or market segments you’re considering investing in; it is also worthwhile to speak with a financial professional about your investing goals and risk tolerance. Their experience can help you make well-informed investing decisions that align with what you hope to gain from investment opportunities.
Focus On Investing as an Opportunity
Even in a volatile market, it’s important to continue making investments in the stock market. By using dollar-cost averaging, focusing on long-term returns and diversifying investments, even the most risk-averse investors can make educated investment decisions that will yield significant gains in the future.
