Here’s a strategy for addressing stock market volatility

When the Dow Jones Industrial Average reaches a new high, investors in the stock market tend to be wearing big smiles. When the Dow plunges hundreds of points in a single day, the mood can shift to fear, even panic.

But it’s usually a bad idea to sell stocks in the midst of a steep downturn unless you need to cash out immediately. That’s because the stock market historically rebounds at some point. If you sell your shares for a low price, you lose out on your chance to recover that lost ground.

It’s also vital to remember that regardless of your investment account statement, you don’t actually make or lose money until you sell those assets you hold. Until then, any losses or gains are only on paper (or today’s electronic equivalent).

Because big swings in the stock market lead to big headlines in the media, it can be easy to miss the smaller, but also important, moves in the bond market. Sometimes bond values will go up when stock prices go down, cushioning the impact of a bad day on Wall Street.

But there are other times when both stocks and bonds fall in value. That’s what happened earlier this month, in October, after the Federal Reserve announced a rise in interest rates, driving down both asset classes. In fact, there appears to be a growing correlation between the stock and bond markets. So investors who own bonds as a hedge against stock market volatility should consider a broader approach to diversifying their portfolios.

For instance, adding assets like real estate, infrastructure funds or credit funds can help counterbalance the swings of the traditional financial markets. These alternative asset classes are affected by factors that are usually unrelated to the Fed’s interest rate actions or Wall Street’s reaction.

For example, real estate funds invest in different types of properties in one or more geographic locations. The value of those properties typically depends on local market conditions, such as the supply and demand for office or warehouse space in the community.

Along with diversifying an investment portfolio, alternative assets can provide other potential benefits. Real estate and infrastructure funds, for instance, can generate a stream of income that can help support a retirement lifestyle. They can also raise the rents, tolls or fees on their assets, providing a hedge against higher inflation. However, alternative assets are often speculative and are also subject to a variety of risk factors. Investors should understand these issues before making their financial decisions.

In building a diversified portfolio, investors should also keep in mind the reasons for holding different types of assets. Historically, stocks have delivered relatively high returns. As a result, they can provide a foundation for growth-oriented investment strategies.

Bonds can be well-suited for income-seeking strategies. An investor could buy individual bonds that provide the same level of income regardless of changing interest rates or market values, and get their funds back when the bonds reach maturity.

Investors can also include highly liquid assets, such as certificates of deposit or a money market fund, into their portfolio as a source of immediate cash to cover a financial emergency or provide money for a new investment opportunity.

In any case, while diversification does not guarantee a profit or protect against a loss, a diversified portfolio with stocks, bonds, cash and alternatives can be an effective approach for long-term investing. While a non-diversified portfolio might work in the short-term, it can be a high-risk strategy for your financial future.

It’s not enough to put your money into an S&P index fund and forget about it for 10 years. You need to consider your personal goals, your ability to tolerate risk and current market conditions when constructing an investment portfolio.

A financial advisor can help you navigate the increasingly complex world of investments. so you can make well-informed decisions about your future.