An Investing Plan Can Make for a Smoother Ride

Ever hit turbulence on a flight? It can be a lot like experiencing volatile markets.

Travel can enrich your world by opening you up to different cultures, cuisines and the vastness of nature's beauty. But like investing, travel – particularly air travel – can come with some stomach-dropping moments.

Think about it in terms of running into turbulence on a flight — and for those of you who do a lot of flying, you know exactly what I mean! A whole host of emotions can come into play: fear, anxiety, a sinking feeling in your stomach, relief, joy, gratitude and more. Sound familiar? It's a lot like riding the roller coaster of volatile markets.

Now, let's face it, most of us don't step onto an airplane anticipating a rocky ride. Much like we don't get into investing expecting to encounter huge market swings to the downside — especially after years of bull market conditions in which equities have been steadily climbing and volatility has remained relatively low. But long periods of calm markets can cause complacency. How can we prepare for market turbulence?

Like the mandatory safety review we get at the start of every flight, covering things like how to tighten our seatbelts and where the exits are in case a speedy departure is necessary, a big-picture plan can be a good place to start. Really ask yourself how you'll feel if your portfolio falls say 5, 10, or 20 per cent. Will you head for the exits at the first sign of a drop, or are you in it for the long-haul and prepared to ride out market fluctuations? Your answer can help you decide if you've got the right investments to get you where you want to go.

Markets are complex and virtually impossible to predict with any reliable degree of accuracy. One common measure of market volatility, however, is known as the VIX index. The Chicago Board Options Exchange Volatility Index, or VIX, gauges market expectations for volatility based on S&P 500 stock index option prices. It's sometimes called the "fear index." A low reading can indicate most investors don't expect much market volatility over the next 30 days, while a higher reading means investor anxiety may be on the rise.

Still, trying to make a call on market direction is like getting in the ring with a heavyweight champ. The odds are largely against you from the start. A better path can be to assess your personal financial situation to determine how you'll fare emotionally should the market suddenly drop, and then make any necessary adjustments. For some, this might mean holding more cash, increasing your portfolio's allocation to fixed income or being more defensive in equity positions. Some investors choose to shift investment assets between cyclical and non-cyclical sectors depending on economic conditions. While no stock is immune to an economic slump, non-cyclical sectors, or defensive sectors, tend to fare better during rough times due to their stable dividends and earnings.

You have to know yourself to understand how much risk you're willing to take on, which will be the gauge for your ideal portfolio mix. Since no one can tell us exactly what's in store — whether travelling or in the markets — having a plan you can stick to can make the ride so much smoother.