Ask Matt: Losing sleep over stocks? Shift your portfolio
— -- Q: Are there ways to make it so the stock market doesn't keep me up at night?
A: You can't change the stock market. You can only change your portfolio.
The stock market is an emotional and volatile place. Investors and computers trade shares of stocks back and forth in nanoseconds, causing stock prices to rise and fall. Just one piece of news can put the market in a very bad mood.
The trick is not allowing the stock market to put you in a bad mood, too.
The fact the market's volatility is unnerving you so much is a good indication your portfolio isn't appropriate for you. It's possible to balance a portfolio with different types of assets to reduce risk. Lower risk, for most people, means more sleep at night.
The fact you're losing shut-eye due to the moves in the market means you need to make some major adjustments. You need to seriously throttle down the risk and volatility of your portfolio.
Being that jittery about your portfolio isn't just bad for your health, it's also bad for your portfolio. Investors who are anxious and jumpy are less likely to make rational and calm decisions during market volatility. You don't want to be the investor who panics and sells at the next market bottom and forfeit future gains.
You're powerless to adjust stock market volatility. But, you can have a hand at controlling the volatility of your portfolio. One of the simplest ways to reduce the ups and downs of the value of your portfolio is by increasing the weighting of bonds relative to the weighting of stocks.
Below is a chart that shows how the long-term historical risk, or volatility, of portfolios falls off as they are tilted more toward bonds. The long-term volatility is measured using standard deviation. The higher the standard deviation, the greater the ups and downs of the portfolio.
The following portfolio types and their long-term volatility, according to IFA.com:
•Aggressive (mostly stocks): 22.8
•Moderate (part stocks, part bonds): 13.0
•Conservative (mostly bonds): 4.2
As you can see, you can easily and dramatically lower the risk of your portfolio by changing the mix of assets.
Just keep in mind that the lower the risk of your portfolio, the lower the returns you can expect to earn. While bonds have had lower volatility in the past, they, too, have generated lower returns. It's a trade-off only you can make, once you decide how much sleep is worth to you.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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