For many investors, August probably brought on a couple of bouts of ticker terror — that horrible feeling that comes when every stock symbol on the screen is red.
One indicator, the Dow Jones industrial average, plunged from 12,143.24 to as low as 10,588.55 on Aug. 9 – a 12.8 percent decline. The 30-stock index rebounded drastically, closing the month at 11,613.53 for a monthly 4.4 percent decline.
This was neither the first volatile trading month, nor likely the last.
The problem with volatility is that it can inhibit action that might make good sense. With that in mind, here are four antidotes to the ticker terror that typically accompanies market volatility.
– Forget you own stocks. Think of your holdings as fractional pieces of businesses. When your portfolio moves drastically up or down, think about a business you know — maybe your health club, hair stylist or gas station. Do you think the value of that business goes up 10 percent one month, then down 10 percent the next? That should give you a sense of how absurd the market can be on a day-to-day basis.
“In the short run, the market is a voting machine,” legendary investor Benjamin Graham said. “In the long run it’s a weighing machine.”
– Consider accelerating your dollar cost averaging program. Dollar cost averaging is the practice of investing a predetermined amount of money at a regular interval. The amount you invest is constant, so you buy more shares when the price is low, and fewer when the price is high. When you do this, the average cost of your shares is typically lower than the average market price per share.
The ugly days in August look like they might have been a great time to buy more of the investments with which you are exceptionally comfortable. Instead of focusing on how much you are “up” or “down,” try this potentially useful question: “At this price, how much of this stock do I want to own?”
– Buy dividend growers, initiators and payers. These companies over time have outperformed non-dividend payers and dividend cutters by a significant margin. It turns out dividends are not only useful for retirees but also for investors of any age who are searching for gold nuggets among thousands of stocks.
According to Ned Davis Research, between 1972 and 2010, dividend growers and initiators in the S&P 500 were up an average of 9.6 percent a year. Dividend payers with no changes in dividends increased an average of 7.5 percent. The average annual gain for non-dividend paying companies was 1.7 percent, and dividend cutters averaged an annual loss of 0.5 percent.
– Invest in alternative asset classes. Complement the core of your portfolio — mutual funds or individual equities — with non-traditional asset classes. Commodities, managed futures and hedge funds can tend to “zig” when the rest of the market “zags.” That can have the effect of making your portfolio’s performance less extreme — good news when stocks are declining.
Sean Somerville is a financial advisor with RBC Wealth Management in Hunt Valley. RBC Wealth Management is a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC. He can be reached at 410-891-5031 or email@example.com.