A restless market is going down, up, down again—and maybe sideways for a little while. What should you do?
Everyone's financial situation is different. What may be good advice for a 21-year-old may not be the best course of action for a 65-year-old.Some investors may be able to afford a little risk in their portfolio, but others? Not so much. And while some folks may be able to muddle through, others may need a professional financial advisor to sort out their situation.
But there are some basic things every investor should keep in mind:
Diversification: You've heard the expression "Don't put all your eggs in one basket." The same holds true for portfolios.
If all your investments are in the same category, and that category takes a hit, you'll absorb all the damage. If your investments are spread out over different categories, then a big hit in one only means a little damage to you. For that reason, many investors divide up their holdings among stocks, bondsand other types of investments. And they often carry the strategy even further, divvying up stock holdings between large companies and small companies, for example. (Check out CNBC stock guru Jim Cramer's take on diversification).
Asset allocation: So if you want to diversify, how do you do it? That basically depends on your age and your appetite for risk. Generally, the older you are, the less risk you want to have in your portfolio, since a loss will be harder to make up over time. So older folks may want more bond holdings in their portfolio, because bonds are considered less risky than stocks, for the most part. On the other hand, younger investors may be willing to take on more risk and so may want a greater percentage of stocks in the holdings in hopes of greater gains over time.
Read More: A closer look at asset allocation
Dollar Cost Averaging: Many investors purchase stocks and other investments at regular intervals in fixed dollar amounts. This tends to reduce the volatility in their portfolios, regardless of what direction the market is moving: as prices of securities rise, fewer units are bought, and vice versa. So you put $120 into a widget stock every month. The first month it cost $30, so you got 4 shares. The next month it cost $20, so you got 6 shares. In the third month, it cost $40, so you got 3 shares. So after three months, you have 13 shares. But the average price was $27 and change.
You see? More shares are purchased when the price is low, and fewer are bought when it is high, so the average price per share goes down over time. This lessens the amount of money at risk, although keep in mind that risk never goes away completely.
Of course, if you think you already know what you need to know, you can check yourself out on this market quiz.
The Next Level ...
1. Knowing the difference between a market order and a stop order;
2. Knowing the difference between growth stocks and value stocks;
3. Appreciating the difference in risks when going long (betting it increases in value) and going short (betting in decreases in value) on a stock;
4. Understanding the metrics of the market, like P/E ratios and Beta; and
5. Knowing at least a little bit about the use of puts and calls in the options market.
Beyond that, there's a whole range of strategies and theories, from technical chart patterns to short squeezes to option straddles. Again, CNBC's Investing section provides more information on these topics. And trading programs "Fast Money", "Fast Money Half Time" and "Options Action" debate these subjects on a regular basis.
If you think you know all the market jargon you need to know, you can check yourself out here.
Of course, some people prefer to have a professional financial advisor handle the sophisticated matters. There, too, are some individual things to consider, like what to look for in an advisor and what questions to ask about his or her work. Check out our Financial Advisor Hub for more.