How To Survive a Volatile Market in 2021

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After a strong market performance in 2020, investors should be prepared for a rockier ride ahead in 2021. A recent analysis by Morgan Stanley predicted that following the S&P 500’s 68% returns from March 2020 to the end of the year, “stocks likely need to take a breather, much as they did in the second quarter of 2010. […] We should therefore brace ourselves for a lot more stock market volatility in 2021.”

So, what should investors do this year as they brace themselves for swings in the market? I asked financial experts to find out their best advice.

Read: 4 Investing Lessons the Pandemic Has Taught Us 

Focus On Your Long-Term Goals Rather Than Short-Term Fluctuations in Your Portfolio

“Seeing your portfolio balance fluctuate dramatically is worrisome for any investor, especially newer investors and older investors who are near or in retirement. But before you panic, remind yourself that shock and surprise are hallmarks of the stock market,” said Carrie Schwab-Pomerantz, SVP at Charles Schwab. “The urge to do something can be overwhelming, but the problem is you often wind up making things worse, either by selling too low immediately after a market downturn and missing out on future gains, or by chasing performance after markets take off. It might sound counterintuitive, but often the best strategy is to do nothing.”

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Schwab-Pomerantz said it’s better to stay focused on your long-term goals than worry about market swings.

“Remind yourself of your long-term goals,” she said. “Not looking at your portfolio too frequently can actually help. While you may be able to look at your investments at any time, it’s often a good idea to match your ‘look interval’ with your investment time horizon.”

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Don’t Try To Time the Market

“People instinctively want big gains without having to bear losses. However, trying to avoid the pain of losses can lead people to not taking enough risk, indiscriminate selling, or holding onto a risky or losing investment for too long,” Schwab-Pomerantz said. “These types of behaviors can have all sorts of negative consequences, from not being able to reach your financial goals to a large tax bill. Attempts at timing the market can often backfire.”

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Since you can’t control the market, focus instead on what you can control — your asset allocation and diversification.

“Your asset allocation should reflect your willingness and need to take on risk,” Schwab-Pomerantz said. “Diversification adds another level of control because all of your holdings will likely not go up and down at the same time, or at the same level.”

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Don’t Give Into Investing FOMO

“Don’t get caught up in the day-to-day talk on social media or feel that you are missing out if a stock jumps 50% in one day,” said FOX Business correspondent Susan Li. “What goes up also comes down quickly if there aren’t the fundamentals (profit, sales, growth) to sustain the frenzied buying. In this new era of social media and trillion-dollar stimulus packages, it’s easy to get distracted by popular trades like Gamestop — but figure out what works for your portfolio.”

Other Options: 13 Ways To Invest That Don’t Involve the Stock Market

Include Some ‘Safe’ Investments in Your Portfolio

Even if you’re willing to take on a high level of risk, you should also be investing in some “safer” assets.

“Cash is king, but the safest [investment] would be U.S. government bonds since Washington, D.C., will always pay the interest on their debt,” Li said. “Besides U.S. government bonds, other typical safety hedges include gold, and some Wall Street experts go so far as to say the biggest American companies like Apple and Microsoft are considered the safest stock investments since they have hundreds of billions of dollars in cash, consistently buy back their own stock and pay out dividends.”

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Be Prepared for Inflation

“A key for investors in 2021 will be to prepare their portfolios for a surge in inflation,” said Todd Jablonski, chief investment officer of Principal Global Asset Allocation. “Look at your portfolio, which is likely underexposed to inflation-sensitive assets, and reposition accordingly. If investors wait for inflation to appear to adjust their portfolios, it will be too late.”

See: 20 Investments That Are Recession-Proof

Don’t Base Your Investments on Past Performance

“Try not to enter the market based on past performance, hoping your favorite stock will have another all-star year — it could happen, but it is better to focus on fundamentals and risk appetite,” said Chantel Bonneau Stewart, a Northwestern Mutual wealth management advisor. “Similarly, some individuals struggle to rebalance their accounts because they did well in a position last year. Always take a step back and look at true asset allocation and goals first.”

Check Out: The Top 10 Stocks for 2021

Work With an Advisor

If you’re wary about riding out a volatile market on your own, don’t be afraid to ask for help.

Advisors can help you “differentiate between financial problems and emotional problems, [and]
keep you on a steady, diversified course,” said Philip G. Palumbo, founder, CEO and chief investment officer at Palumbo Wealth Management.

They can be especially helpful in the current market climate.

“There will be an increased need to distinguish between winners and losers to reap rewards in the market. This environment — where discernment will be rewarded — behooves professional advice and active management,” Jablonski said.

It can also be helpful to have someone look at your investment strategy with a fresh set of eyes.

“Working with an advisor can often help you discover another point of view, and point to strategies and options you may not have considered,” Schwab-Pomerantz said.

Once you’ve worked with a professional to put an investment plan in place, you should stick with it.

“The plan should be one that addresses their cash flow needs, risk tolerance, goals and objectives for their money,” said Nina Gunderson, account vice president and financial advisor at UBS. “Investors should not deviate from the plan that they work on with their advisor unless there is a real reason to make changes based on anything that may have changed in the investor’s life — if their risk tolerance has changed, or their potential need for the money has changed.”

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Gabrielle Olya contributed to the reporting for this article.

Last updated: April 12, 2021

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With eight years of experience working in the personal finance space at GOBankingRates, Jaime Catmull has amassed an extensive network of financial influencers and experts. Now, she’s tapping that network to get the real scoop on how you can live your best financial life and increase your wealth.
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