Diversification is an important tool in lowering the volatility of an investor's portfolio, but achieving this becomes more difficult in a bear market where the pessimism of market participants motivates them to sell off various assets, pushing them down at the same time.
The depreciation experienced across many asset classes during the most recent recession exemplifies how investments can follow each other during a down market. As the market crash was system-wide, participants responded by pushing the value of various assets to lower values.
Finance experts have repeatedly touted the strategy of portfolio diversification, which involves holding assets that follow each other in value as little as possible. For example, gold's strong appreciation of 10 percent in 2011 displayed a low correlation to the S&P 500 Index, which was virtually unchanged from the beginning of the volatile year to the end.
Assets display higher correlation during bear markets, as the poor sentiment of investors causes them to engage in broad selloffs of many different investments, causing them to fall in value at the same time.
Young investors can overcome these challenges by waiting out down markets and focusing on long-term financial planning. These market participants need to look at the appreciation that their assets will enjoy in the long run.
People who will not need to take money out of their investments for many years can simply ride out the down market conditions.
One major temptation that many investors will face is following the rest of the market and selling their assets when they have dropped in value in an attempt to prevent further losses. People planning for long-term financial goals should resist "jumping on the bandwagon" with other investors and unloading their assets when the market is performing poorly.
Data provided by various studies recently conducted by market experts indicate that many individuals are facing challenges in planning for their retirements, so young investors who are just starting out can benefit from studying basic principles that will help their long-term financial planning efforts.
Data generated by a recent Wells Fargo study indicates that three-quarters of respondents, who were earning an annual income between $25,000 and $100,000 and aged between 20 and 70, said that they planned on working during years that have traditionally been used for retirement, according to Reuters.