Conventional wisdom says that what goes up must come down. However, even if you view market volatility as a normal occurrence, it can be tough to handle when it’s your money at stake. Though there is no foolproof way to handle the ups and downs of the stock mar­ket, the following common sense tips can help.

Don’t put all your eggs in one basket

Diversifying your investment portfolio, also known as asset allocation, is one of the key ways you can handle market volatility. Because asset classes typically perform dif­ferently under various market conditions, spreading your assets across a variety of investments such as stocks, bonds, and cash equiva­lents (e.g., money market funds, CDs, and other short-term instruments), can help reduce your overall risk. Ideally, a decline in one type of asset will be balanced out by a gain in another, but diversifica­tion cannot eliminate the pos­sibility of market loss. Within the investment arena the range of investment options are quite significant; a short list would include Large, Medium, and Small Company stocks, Value and Growth Stocks, Foreign, Domestic, and Emerging mar­kets. The fixed income arena would include Government, Corporate and Tax-Free bonds, short, intermediate and long term. Alternative invest­ments could include REIT’s, Commodities, Long/Short Funds, and Private Equity. This is but a sample of the various asset classes that can be part of a well-diversified portfolio. It is also important to understand that many times that the funds you have within your portfolio may be investing in the same securi­ties, which, in effect, overlap. Therefore, as you can appreciate, it is important to know how and what you are invested in not only by name, but also by how they will react under various market conditions.

Can you have too much of a good thing?

Having a large holding of a single stock that dominates your portfolio can add significant risk to the future value. Whether it’s a result of a stock-based compensa­tion plan from your employer, inherited holdings, or loyalty to a past winner, keep in mind that even the best stocks can suffer serious reversals on occasion.

Focus on the forest, not on the trees

As the market goes up and down, it’s easy to become too focused on day-to-day returns. Instead, keep your eyes on your long-term investing goals and your overall portfolio. Although only you can decide how much investment risk you can handle, if you still have years to invest, don’t overestimate the effect of short-term price fluctuations on your portfolio. Be sure the funds you have invested are investment monies—we classify invest­ment money as funds that will be invested for a minimum of 5-7 years.

Look before you leap

When the market goes down and investment losses pile up, you may be tempted to pull out of the stock market altogether and look for less volatile invest­ments. The small returns that typically accompany low-risk investments may seem down­right attractive when more risky investments are posting negative returns.

However, before you leap into a different investment strategy, make sure you are doing it for the right reasons. How you choose to invest your money should be consistent with your goals and time horizon.

For instance, putting a larger percentage of your investment dollars into vehicles that offer safety of principal and liquidity (the opportunity to easily access your funds) may be the right strategy for you if your invest­ment goals are short-term (e.g., you’ll need the money soon to buy a house) or if you’re growing close to reaching a long-term goal such as retirement. But if you still have years to invest, keep in mind that stocks have historically outperformed stable value invest­ments over time, although past performance is no guarantee of future results. If you move most or all of your investment dollars into conservative investments, you have not only locked in any losses you might have, but you have also sacrificed the potential for higher returns over the long term.

Don’t count your chickens before they hatch

As the market recovers from a down cycle, elation quickly sets in. If the upswing lasts long enough, it is easy to believe that investing in the stock market is a sure thing. But, of course, it never is. As many investors have learned the hard way, becoming overly optimistic about invest­ing during the good times can be as detrimental as worrying too much during the bad times. The right approach during all kinds of markets is to be realistic. Have a plan, stick with it, and strike a comfortable balance between risk and return.

Don’t stick your head in the sand

While focusing too much on short-term gains or losses is unwise, so is ignoring your investments. You should check up on your portfolio at least once a year, more frequently if the market is particularly volatile or when there have been significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk toler­ance. If you need help, a financial professional can help you decide which investment options are right for you.

Securities offered through LPL Financial. Member FINRA/SIPC. Portions of this article provided by Forefield, Inc.