Sharp and unpredictable fluctuations define a volatile financial market. These shifts can shake investor confidence, even with experience. Watching a portfolio lose money is uncomfortable, and it’s natural for individuals to question their investment choices. While it may feel difficult to stay the course, a good financial plan anticipates and plans for periods of market volatility. Staying consistent and faithful to that plan can also pay off over time. Here are some tips to help investors take market changes in stride.
Understand Market Cycles
Investors should learn the fundamentals surrounding market volatility. First, volatile markets are cyclical and for the most part, temporary. Economic, political, global, and social factors can cause market expansion and contraction, such as an election or inflation spike. Next, “volatility,” can refer to movements in either direction, so not all swings are negative. Downside market volatility poses the most concern and there are two main situations:
- Market correction—A dip of 10% or more in a major market index which includes the Dow Jones Industrial Average, the Standard and Poor’s 500 (S&P 500), or the National Association of Securities Dealers Automated Quotations (NASDAQ) Composite.
- Bear market—A slide of 20% or more. [1]
Market declines can provide opportunities to find value in certain investments experiencing a temporary drop. Investors should resist the desire to sell stocks based on market movements alone, which could result in a permanent loss when the market stabilizes. Recognizing that volatility is normal and occurs regularly, investors will feel more comfortable when markets shift.
Trust the Financial Plan
Investors working toward their financial goals with the help of a financial advisor should take solace in their foresight to do so. Together, they create a retirement roadmap with a mix of investments and asset classes that considers the client’s risk tolerance, goals, and timeline. During the early stages of the financial planning process, SHP advisors conduct a comprehensive risk analysis that determines the potential risk and upside within a portfolio. They establish a 5-part plan that includes investments, income, taxes, healthcare, and legacy/estate planning. They consider the client’s risk tolerance, income gaps, and assist in setting goals while considering taxes, inflation, and…market volatility. When markets turn unpredictable, investors should feel comfortable checking in with their financial advisor to address any concerns. However, planning for market volatility is a part of any good financial plan.
Focus on Long-term Goals
During periods of market volatility, investors should stay focused on the financial horizon, and not become overly occupied by short-term losses or gains. These shifts usually have minimal impact on long-term financial goals, like retirement or a child’s education. Rash decisions during periods of market volatility can be counterproductive in the long run. It is a good idea for investors to review their portfolio and risk tolerance, however, making rash decisions based on emotion alone can lead to undesirable results.
Diversification
Diversification means spreading investments across different asset classes, sectors and regions. It is one of the most powerful strategies for managing risk in financial planning. It reduces the impact of an economic downturn in any single area. Diversification can fortify a portfolio against a volatile market by stabilizing it. Gains in one investment can offset losses in another. Investors should conduct a regular portfolio review with their financial advisor to rebalance as necessary and remain on track for their investment goals.
Seek Professional Advice
For those who haven’t sought the assistance of a financial advisor, there is never a bad time to do it. Volatile market periods provide the perfect opportunity to create a plan to combat these shifts, and research shows these are the times people often do. Cerulli Associates researched three notable periods of volatility in the last decade. They reported an uptick in demand for financial advice in the year that followed each volatility spike. Additionally, a SmartAsset advisor survey reported more than half of its respondents cited stock market volatility as the impetus for reaching out for advice in the first quarter of 2022, and for good reason. [2] Advisors know how to position accounts to drive income. They earmark assets for income, safety, and growth. They correct the common mistakes investors make when they try to go it alone, for example, an aggressive portfolio that doesn’t align with the client’s more conservative risk tolerance, objectives, or timeline. Investors don’t want to spend time worrying about their portfolio performance. An advisor can allay investor concerns as those with an existing relationship already know.
Investors can financially prepare for unexpected shifts in the market by having a thought-out financial plan. Being patient, trusting in the plan, and communicating with a financial advisor will aid investors in emotionally weathering stormy markets. If you need help navigating an unpredictable market with greater confidence, contact an SHP advisor for a complimentary review of your finances today.
Sources
[2] https://smartasset.com/advisor-resources/advisors-market-volatility
