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Market volatility & your investments: What you need to know

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If you have a 401(k) or IRA with stocks, bonds or mutual funds, you know their value can fluctuate up and down. There have generally been more ups than downs over the long term—otherwise investors would find different ways to make money.

With the potential for reward comes the reality of risk. But you can’t control many of the risks associated with investing. For example, there’s nothing you can do about inflation or market downturns and any number of other risks that lead to market volatility.

Whether you have five years or 30 until retirement, your investments could have decades left in the markets. You’ll be better prepared to absorb the risks you can’t control if you have a strategy for managing the things you can: your emotions, your ability to handle risk, and how your investments are diversified.

Here are six tried-and-true ways you can take control of your retirement strategy.

Keep your emotions in check when markets dip

You may recall the Great Recession of 2008 and 2009, or more recently the severe market swoon in early 2020 at the beginning of the COVID-19 pandemic. If events like that have you second-guessing your investments, history can help.

The S&P 500 Index has endured 13 bear markets since the end of World War II—all of which fully recovered in an average of 26 months, with the index even exceeding its peak by an average of 68%. The S&P tracks stocks of 500 leading companies in leading U.S. industries.

Though you can’t invest directly in an index, the S&P does offer a glimpse into why you shouldn’t panic if your 401(k) or IRA drops in value. While past performance doesn’t guarantee future results, the best strategy for having your investments grow is to stick to a long-term plan.

It’s normal to feel nervous when markets drop, but don’t let emotions take over because you could end up missing out on gains when markets recover.

Assess (or reassess) your risk tolerance

There are risks to investing your money. On the one hand, the younger you are, the less you need to think about investment risk because you have a long-term horizon. On the other hand, your ability to stomach market ups and downs doesn’t correlate to age.

Understanding your risk tolerance is an essential step for protecting against market volatility over time. And it’s important to note that long-term investing is not a set-it-and-forget-it proposition. Since your ability to handle risk may change, be sure to reassess your tolerance regularly. With our risk tolerance quiz, you can get a quick look at where you stand.

Diversify your investment portfolio

The market is unpredictable and the best investment in any asset class can change often. That’s why you can’t count on any single type of investment to be the best performer year after year. To prepare for this inevitability, diversification could be one key to your investment success.

An often-overlooked sign you’re lacking diversification is aligning your portfolio with your line of work. Let’s say you work for a public tech company and all your 401(k) investments are in that company’s stock. What happens if the company fails?

Always pay attention to whether you may have relied too heavily on one profitable or reliable asset class and, as a result, neglected the need for diversification. Make sure you have a variety of investments across a range of asset classes—like stocks, fixed income and real estate—with varying risk in your portfolio.

Understand that diversification can help reduce market risk, but it does not eliminate it. Diversification does not assure a profit or protect against loss when markets are down.

Invest consistently with dollar cost averaging

If you’re tempted to time the market, try dollar cost averaging* instead. It’s a strategy to help buffer against volatility by investing equal amounts at regular intervals, whether the market is up or down. You are likely already using dollar cost averaging if you are contributing regularly to a retirement plan at work, or an individual plan if you are self-employed.

Dollar cost averaging can be especially effective if you are a younger investor with time on your side. Learn more about how dollar cost averaging works.

Avoid using investments for emergencies

While investing money for long-term goals is important, saving is a vital part of any financial plan. Methodically building up a savings cushion over time can help you cover unplanned expenses. Prioritize setting up an emergency savings account if you haven’t already.

What’s more, emergency savings may help you stay calm during fluctuating markets if you can tap into savings rather than your investments.

Review your strategy with a financial advisor

For more than 100 years, Thrivent has helped people with their long-term financial goals, in times of economic growth and strain. We’re committed to providing clients with the financial strength of a company they can trust.

Ready to assess your investment strategy? Connect with a financial advisor near you to get personalized advice for your goals.

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*Dollar cost averaging does not ensure a profit, nor does it protect against losses in a declining market. Because dollar cost averaging involves continuous investing, investors should consider their long-term ability to continue to make purchases through periods of low price levels and varying economic periods.
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