Price volatility never takes a vacation. Even when stocks generally are holding steady or rising, individual issues may drop precipitously within a few hours. And overall values may turn strongly downward during a single day’s trading. When the market’s volatility is high, watching the value of your portfolio shrink is not the easiest thing to do. Still, strategies are available that may help you to manage the risk to your portfolio.

Hold on for an Upswing

Long-term market history helps put price volatility in a clearer perspective. The stock market lost value during nine of the forty years from 1968 through 2007, as measured by the S&P 500 Index*. But the market made gains in six of the years following the years with losses.

This suggests what may be a sound strategy: Hold on to stocks when the market turns down and wait to take advantage of an upswing. However, although the market usually recovered in the year following a downturn, there are no guarantees. A 26.49% loss in 1974 followed the loss of 14.80% in 1973. Still, the market was up by 37.27% in 1975. And someone who invested $10,000 in 1982 and earned returns that matched the S&P 500 through 2007 would have had an average annual return of 13.37% and a portfolio worth more than $230,000 before considering taxes or expenses. Note that past performance is not a guarantee of future results.

You may be able to use a market downturn to reduce your income taxes while you remain invested in the market. Simply swap stocks or funds. First, realize a tax loss by selling a stock or fund investment that has a paper loss. Then, immediately reinvest in a similar stock or fund. You will still be positioned to take advantage of the next market upswing, but you will also secure a current-year tax deduction. Note that tax law does not allow deducting a loss if the taxpayer buys a substantially identical investment within the 30 days before or after the sale.

Reduce Overall Risk by Diversifying

Diversification is a long established, proven strategy for portfolio risk reduction. If you have not done so already, you may dampen the effect of market downturns on your overall portfolio by spreading your investments into different asset classes and, within your stock position, into different market sectors. Again, there are no guarantees, but holding a portion of your portfolio in cash equivalents or bonds, for example, may be very comforting in years when cash or bond returns exceed stocks, as the chart shows they have done occasionally.

Seven Recent Years when Stocks Returned Less than Bonds or Cash Equivalents

Echo Zhang is a Certified Financial Planner™ and a Certified Retirement Counselor®. She has more than 15 years of working experience in the field of accounting, finance, and insurance. As a Financial Advisor, Echo believes in holistic wealth management approach and concentrates her practice in retirement lifetime income planning, insurance planning, charitable giving planning, fixed income portfolio, and strategic wealth transferring.