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Optimize Your Investment Strategy During Market Volatility

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While the world faces the health, social, and economic effects of COVID-19, it can be difficult to implement your investment strategy. This is the most severe market volatility that many investors, veterans, and novices alike have ever experienced. Overall, it can feel pretty daunting to be an investor. I’d like to address a few ideas that can help you stay balanced and focused in this volatile time.

Step back and chill out

During crisis times, attempt to stay as neutral as possible. Every day, we are inundated with hundreds of new virus-related headlines. It can be overwhelming and disheartening. A steady stream of bad news can result in reactionary “fight-or-flight” behaviours. Stress-induced fight-or-flight reactions are quick and spur of the moment. People do not operate in their best cognitive, emotional, relational, and intellectual capacity when they are fearful and reactive. A great example is the global run on toilet paper, water bottles, and canned goods.

Fight-or-flight reactions are not the best way to think, live, or invest. If you feel your stress levels rise, take a break from your news feed. Instead enjoy the extra time with your loved ones, take a walk, be thankful, think positively, and choose to believe in a better future.

When considering your investment strategy, you need the peace of mind to operate at your highest level of cognitive and intellectual capacity. The stock market will likely experience volatility for some time to come. It can be easy to find your emotions riding along with the ups and downs of the market. Unfortunately, for many investors, it means they end up selling on a down day and buying on an up day. Selling out of panic often means you are selling at the wrong time. Make sure the investing decisions you make are well thought out, rational, and focused on the long term.

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Make a plan

Take time to make a plan. Begin by evaluating your financial situation and investment strategy. Do you have a budget? Do you have enough savings to live off for a three- to six-month period if you needed to? What are your short- and long-term financial goals? Do you have the financial capacity to invest right now?

Then make a concerted effort to get organized. Evaluate your financial position, plan for the future, and get feedback about your plans/goals from people you trust (like your financial advisor).

Take your time

Should you have some expendable capital to invest, don’t spend it all on the next market dip. Rather, create a list of your top favourite companies. Make sure you deem them worthy to hold for a long time (five years or more). Look for companies with defensive qualities, such as large capitalizations, cash-rich balance sheets, extra liquidity, and the ability to operate now and in the future. These are companies that can become foundational for your investment portfolio. Some examples could be Brookfield Asset Management, CP Rail, Algonquin Power, BCE, or CAP REIT. Focus particularly on quality and avoid the urge to trade stocks during periods of volatility.

The COVID-19 crisis will likely play out over a number of months, if not a year. There will be continued opportunities to “buy the dips.” Consider the approach of Motley Fool co-founder, David Gardner. He suggests taking a measured approach by consistently investing a set amount every month. Gradually buy a third of a position and then add to that position later. By doing this, you slowly average your cost base.

Nobody can time a market bottom. Developing positions over time allows you to spread out your overall risk profile and enables more financial flexibility. It is best to take a nimble approach in times of crisis. If your financial circumstances were to drastically change, you can quickly pull back your investing allocation, and hopefully you will still have some safety cash to rely on.

The Foolish takeaway

The point is to avoid making fear-based, reactionary decisions. Don’t let anxiety and panic be the levers that operate your investment strategy. Be calm, develop discipline, create good habits, and methodically invest with a 10, 20, or 30-year time horizon. Looking back, you will surely remember the principals that helped you achieve your long-term financial dreams.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robin Brown owns shares of Brookfield Asset Management. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool recommends BROOKFIELD ASSET MANAGEMENT INC. CL.A LV.

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