EQUITY MARKETS HAVE flashed volatility lately. Even for those with long-term goals and a solid investment philosophy, it can be daunting.
Nerves get rattled on days with plunges of 1% or more, but things can seem calm again when markets go back into rally mode in subsequent sessions.
What to make of this roller-coaster action? Is this volatility normal? Does it mean a big crash is around the corner? Is it safe to sit through it? Should you just hold tight and hope for the best?
For investors who have confidence in their financial plan (as distinct from a budget or some projections on a spreadsheet), it may be easier to ride out a bout of volatility. But even if that describes you, it’s very possible to be negatively affected by news reports and the anxiety of your friends and family.
How Do You Combat Volitility Concerns?
First, it’s important to understand that market volatility is normal. Intellectually, you realize that stocks go up and down. Downturns are disappointing, but should not be surprising. Unfortunately, several factors make investors unusually nervous these days. Pre-retirees remember the 2008 market meltdown and today’s contentious political climate can stoke these fears.
Unfortunately, an impetuous, emotional reaction to market volatility can cause more harm than good. For example, you might sell stock at a lower price and the market rebounds soon after, but you don’t time your new purchases correctly, or be too skittish to invest again and miss out on a rally. While remaining in cash too long not only means missing out on the next rally, it also means your money is languishing in low-interest-rate instruments and is unlikely to stay ahead of inflation.
It’s not necessarily easy, but tuning out the noise is a good practice for investors. Having a financial plan is a great first step. Sadly, many non-fiduciary advisors will create a document that shows expected investment returns, with perhaps some other pieces of cursory data included, and call it a plan.
Your Financial Plan
A true financial plan is not a one-and-done document, neatly bound in leather and embossed with your initials.
Instead of caving in to an emotional desire to hit the sell button when markets decline, review your financial goals. A good plan should take volatility and stock market declines into account.
Without a comprehensive plan, it’s understandable that a sharp or prolonged market downturn might send you into a panic, since you have no idea whether you are on track to meet your goals, and whether the correction will devastate your retirement.
When the stock market heads south, instead of rushing to the perceived safety of cash, review the elements of a good financial plan.
How are you positioned? Are your investments positioned the right way to generate the growth and income you need to maintain your lifestyle and cover expenses throughout retirement?
Do you have a plan for withdrawing money from your accounts? Does this plan include required minimum distributions from qualified accounts? Your plan should also include tax consequences of all your retirement income, including account withdrawals, Social Security, pensions, income from work or any other sources. Taxes are a big expense in retirement, something many people don’t realize.
Have you reviewed your insurance? Often, people keep paying life insurance premiums after they are retired and don’t need to replace income from work, to support a spouse or family. It’s fine if you are using insurance for purposes such as estate planning, but make sure you understand why every policy is in place.
Do you have good plans for a transfer of your assets? Many people assume a will covers their wishes, but often, a will was created decades ago and is no longer entirely applicable. Life changes. Children grow up and have their own children. Situations relevant 20 years ago are likely not relevant today. Also, your beneficiaries on your investment accounts take precedence over beneficiaries named in a will. Be sure those are up to date, as well.
You can’t avoid uncertainty in life. Your situation is always evolving; nothing is ever written in stone. This is why a plan should be reviewed on a yearly basis.
Likewise, markets change. Today’s downturn morphs into tomorrow’s rally. Investors frequently justify an emotional decision to sell by trying to frame it logically, using economic or market data as a way of rationalizing fear.
Markets will go up and down. This is known. While it’s tempting to say, “This time it’s different,” there is no reason – not even chaotic politics – to assume the next downturn won’t reverse course at some point and become a fresh rally. You don’t want to make a trading mistake that results in a terrible outcome for your retirement goals.