Five Ways to Keep Your Cool in Wild Markets

Question: I've heard about the importance of not panicking when the market swoons like it has during the past few weeks. But I can't stand watching my portfolio lose money day by day, and I'm worried we're in for a repeat of 2008/early 2009. Any tips?

Answer: If you're an investor who has a hard time tuning out the day-to-day market noise--and there's been a lot of it lately--you need to find a set of tasks that will burn off your nervous energy and help you channel it into something more productive.

Tackling activities like the ones that follow is a good way to win back control in what has been an unnerving market environment. So when things are going from bad to worse in Greece (or Spain, or Portugal...), you can take comfort in knowing that you're doing your fair share to influence your investment results for the better.

Here are five ways you can remain calm even when the market is not.

1. Check to see if rebalancing is in order.

One of the biggest mistakes investors can make is to be too reactive when the market is volatile (or even when it's not), venturing into and out of stocks based on headlines rather than real, fundamental reasons. Instead, a better strategy is to put your time into crafting an asset-allocation blueprint that makes sense for you, then making adjustments only when your current allocations veer from your targets in a meaningful way.

I usually define "meaningful" as a 5- or 10-percentage point drift in your asset allocation versus your targets. Given that market correction we've experienced recently it's worth investigating whether it's time to rebalance. Morningstar's Instant X-Ray tool can be an invaluable way to get a precise read on where your asset mix currently stands.

2. Upgrade/take risk off the table.

If your asset-allocation review showed that you need to make some changes--or even if it didn't--it's also a good time to take a look at how your portfolio is positioned on an intra-asset-class basis. Following a sharp runup in risky, economically-sensitive assets (for example, high-yield bonds, many small-cap stocks) during the past year-plus, your portfolio may be heavier on such names than you intended it to be. Meanwhile, our equity analysts have been arguing that so-called wide-moat stocks--high-quality companies with sustainable competitive advantages and cash-flow-rich businesses--look relatively cheap right now. All in all, it's looking like a good time to upgrade the quality of your portfolio while taking some risk off the table.

3. Increase your savings rate. (Refinancing, anyone?)

The biggest lever any of us have as investors is how much we've saved, so one sure way to seize control in a volatile market is to simply stash more away.

That's easier said than done, of course. But if you have a mortgage, it's a good time to investigate whether you can reduce your borrowing costs by refinancing. With house prices having recovered a little ground and the interest rate at a record low, homeowners may find they've increased their equity over the past year or so and could benefit from more favourable borrowing rates, thanks to a lower loan-to-value ratio. Cutting financing costs such as your these will reduce your monthly outlay each month, thereby boosting the amount you have at your disposal for saving and investing.

4. Check up on what you're paying.

Also under the heading of factors you exert control over is how much you're paying in investment-related costs. True, each of your investment expenses might not look large on a one-off basis--it's hard to get excited about whether you're paying £10 or £15 for trades, or whether your fund charges you 1.00% per year or twice that much. When these costs are rolled up together and compounded over many years, however, they can have a significant impact on returns.

Here at Morningstar we're always evangelising about the importance of keeping fund expense ratios low; our Fund Compare tool can help you compare the expenses of up to five funds or ETFs.

Limiting your own trading, while invariably a good idea from an investment standpoint, has the salutary effect of reducing the commissions you pay on an ongoing basis; it may also reduce your tax costs (more on this topic below). Finally, keep close tabs on any additional layers of expenses you're paying, whether to your financial adviser or to be part of a company-retirement plan. Some of these costs are invisible, in that you don't actually write a cheque to the service provider, but they can take a bite out of your returns all the same.

5. Reduce investment-related tax costs.

In a related vein, stressed investors can also take comfort in knowing they exert significant control over their investment-related tax costs. There are myriad ways to cut investment-related taxes, but one starting point is to contribute the maximum to any tax-sheltered investment vehicles you can avail yourself of, such as ISAs.

Christine Benz is Morningstar's director of personal finance; Holly Cook is editor of Morningstar.co.uk.