8 smart strategies to navigate market volatility and protect your investments

When you start investing, you'll notice that market volatility—also known as your portfolio's ups and downs—is an inevitable part of investing.

That's because the market's movements are driven by factors beyond any individual investor's control or influence. The pandemic is a perfect example of how impossible it is to predict or even prepare for economic ups and downs.

Despite the uncertainty, it's important not to shy away from investing. In fact, investing is a powerful tool that can significantly impact your financial well-being. It allows your money to grow, potentially outpacing inflation and giving you more control over your financial future.

The key is to focus on controlling your behaviour concerning market volatility, and ensuring you're only exposed to as much volatility as you can handle.

Money.ca shares eight effective strategies for successfully navigating the market to maintain the health of your investment portfolio.

1. Invest in a diversified portfolio

What's the best advice you'll ever get about handling volatility in the market? Put most of your money into a broad, diversified portfolio of different investments.

The easiest way to maintain a diversified portfolio is with robo-advisors. Robo-advisors handle the complicated details for you. You add money to your account and answer a few questions about your investment goals and risk tolerance and the rest is done for you. Based on your investment profile, they divide your funds into investments in multiple countries and industries, and between risky investments like stocks and less volatile ones, like bonds.

Remember that, just because one industry or investment category might be experiencing wild swings, doesn't mean that every industry is experiencing them. That's why having your money spread between different investment categories and stocks is vital. This approach mitigates the highs and lows you might experience over days, weeks, and months, making it easier to ride out any sudden moves.

If you had 100% of your money invested in airline stock during the height of the pandemic, how would your portfolio have looked in the first six months of the pandemic? Probably not great. But, bundle those airline stocks into a portfolio that was also exposed to industries like tech and banking, and you would be much better situated to ride out the market downturn.

2. Invest regularly

Your monthly budget should include a line item for long-term savings you invest in for retirement—even if it's a small amount (everything counts).

Putting aside money monthly for your future self is a smart move. Still, it also has a hidden advantage: It naturally has the side effect of helping you manage market volatility.

Let's say that you invest $12,000 a year for your retirement. If you put the entire amount in all at once and the market crashes right afterward, keeping your emotions in check might be more challenging.

But if you put $1,000 into your investments every month, there is less money right before a mid-year crash; you'll also have money left over to invest at the lower levels the market moved to. Effectively, you're buying more investments for the same "price."

Plus, since you're investing monthly, you can set up automatic contributions and then forget about them, so you might not even notice when the stock market takes a dip.

3. Know your timelines

There have been some famously bad times in stock market history. Black Friday in 1929 and the housing crisis of 2008 come to mind.

However, investors can take comfort in the broader market trend over the decades. Sure, markets can go down for months and, sometimes, even years. But over the long term, they tend to go up.

Suppose you're investing for the long term, like retirement. In that case, that's a helpful frame of reference to keep in mind when you see fluctuations happening in the market—and with the amount of news coverage that the stock market gets, you might see fluctuations even if you're not looking for them.

Short-term fluctuations are a normal part of the market's ebb and flow, and "short-term" can be as long as a few years. But if you know you're investing for the next 30 years, not the next two, it's a lot easier to hold tight, keep investing on a regular schedule, and ride it out.

4. Hope for the best, but make sure to plan for the worst

Everything discussed so far assumes you have a diversified portfolio of long-term investments. Even if that's most of your portfolio, you can always add some riskier investments, like individual stocks or cryptocurrency, if doing so fits with your goals, interests, and risk tolerance.

That said, keep in mind that you're upping the ante on the amount of volatility you'll be exposed to since individual investments like this can move much more quickly and often than the broader market.

When the overall market gains or drops 10%, it's a major breaking news story. When a single stock moves 10%, it's a Tuesday.

That's why there are two absolute musts to follow if you're investing in riskier kinds of stocks:

• Only invest what you can afford to lose. You have to be okay with this investment going to $0. If you're not, or if that would seriously impact your financial plans, it's too risky—and you're setting yourself up to make panicked decisions that aren't in your best interest.
• Only do this kind of investing outside your balanced, diversified portfolio. Once you've got a solid foundation in your investment account—one that will track the broader market—you can start putting some money into riskier bets, since the bulk of your savings aren't going to tank if that one speculative investment drops by 75%.

5. Don't look at your investments

It can be challenging to not peek at how your portfolio is doing almost daily—especially if you're new to investing. But it can be a much better move to check your portfolio as rarely as possible (as long as you're not actively managing your investments on your own, in which case you should check your investments more often). This approach can help you avoid any impulses to take action based on market volatility.

Plus, there's something satisfying about saying, "Nope, hadn't been paying attention," when someone asks if you've heard the news about how crazy the stock markets have been acting.

If you plan to set up your investing with a robo-advisor, you don't need to pay attention—you can spend that mental energy on things that can make a difference in your life. Because trying to time the market or control market volatility isn't one of them.

6. Rebalance your portfolio regularly

Rebalancing your portfolio is essential. It means periodically adjusting the proportions of different assets in your portfolio to always match your investment goals. Over time, because the market constantly changes, some investments may grow faster than others while others can shrink, causing your portfolio to drift from its original balanced strategy.

By periodically rebalancing, you can ensure that your portfolio remains aligned with your risk tolerance and investment goals. Note that if you don't feel comfortable balancing your portfolio on your own because you don't have the time or familiarity with the markets, you can invest with a robo-advisor who will do the rebalancing for you automatically when needed.

7. Maintain an emergency fund

An emergency fund is crucial for financial stability, especially during market volatility. An emergency fund provides a safety net that allows you to cover unexpected expenses without selling investments at a loss. Aim to save three to six months' worth of living expenses in an account that is easily accessible. If you've got a nice nest egg set away, it can help you stay invested during market downturns and avoid making impulsive decisions based on short-term market changes.

8. Stay informed but avoid overreacting

Staying informed about market trends and economic indicators can help you make better investment decisions if you've elected to actively manage your investment portfolio with a self-directed account. However, it's important to avoid overreacting to short-term market developments. Keeping calm and sticking to your investment plan can help you navigate market volatility more effectively. Always remember that investing is for the long term.

—with files from Sandra MacGregor.