Market volatility is a natural part of investing, which means that risk and reward go hand in hand as markets rise and fall. With high inflation in 2022 and the potential for recession in 2023, volatility may be here for quite some time. Fortunately, you can follow some timeless advice to build up your financial confidence. Making mindful decisions about your money can help your 401(k)s, individual retirement accounts (IRAs) and other investments hold up in the face of market volatility.
Whether you have years or decades to go until retirement or you're already retired, certain best practices and behaviors can help you navigate volatile markets while keeping your emotions in check. Here are the main points to understand.
What should I know about market volatility?
Volatility in the markets can be defined by pronounced swings up and down in the prices of investment securities like stocks, bonds and mutual funds. A volatile market can be brought on by negative economic activity, such as inflation and rising unemployment, or by unforeseen events, such as a global pandemic or war.
For example, following the onset of the COVID-19 pandemic, the
Keep in mind that large crashes can be followed by large recoveries, and historical data supports that claim. Between the bottom of the COVID-19 crash in March 2020 and the subsequent January 2022 peak, the stock market climbed more than 100%. Following the 2022 low point on September 30, stocks rallied nearly 15%.
These swings came as a surprise to many and can be the cause of a great deal of financial anxiety. However, expect that the market will naturally have peaks and valleys in the future. By accepting volatility as a market inevitability, you can shepherd your resources and expectations with care and work to create financial security for yourself and your loved ones.
How do I prepare for a stock market crash?
Market crashes are nearly impossible to predict, which means that you should always attempt to invest in a way that aligns with your investment goals and risk tolerance. For instance, if you have a few decades of investing ahead of you to achieve a long-term goal such as retirement, you could maintain an asset allocation that leans more toward stocks than bonds.
If you are retired, you may want to remain more conservatively invested. It may fit your interests to invest for your short-term income needs in stable assets, such as cash, fixed income and shares of established companies with a track record for paying dividends. Understanding volatility can help give you the confidence to navigate future swings in the market.
What is a bear market?
When stock prices fall by 20% or more from a recent peak, it's known as a
Should I take my money out of the stock market when it experiences losses?
If you are wondering if it's smart to move your 401(k) or IRA out of the stock market while it's crashing, the short answer is no.
It's impossible to know in advance exactly when stock prices will resume their climb back upward. Furthermore, the largest gains in the market often occur after the largest declines, so time in the market often beats timing the market.
If you need cash during a down market, it's wise to have an
Your risk temperament is based on what's going on in the world and what stage you are in using those monies.
How do I invest in a volatile stock market?
While you can't control stock market volatility, you can control how your investment portfolios are managed. There are a number of timeless tips and strategies for investing during volatile markets. Here are six ways to deal with a volatile stock market:
1. Don't make emotional decisions.
It's normal to feel nervous when markets drop, but it's important to try to keep your emotions in check. Withdrawing money while the market is down is essentially locking in the losses before there is time for it to rebound. By staying the course, you may end up making gains when the markets recover. Before 2022, the stock market, as measured by the S&P 500 Index, had 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%.
2. Assess (or reassess) your risk tolerance.
Planning in advance and selecting a combination of investments that align with your investing goals and tolerance for risk is a smart way to invest during a volatile stock market.
Your risk tolerance may change over time as your life changes so be sure that you don't set and forget it. "It can be because you're becoming more comfortable in your investment strategy," says Sarah Auernhammer, a wealth advisor at Thrivent. "It may change because you may need more money in the short term because you're going to be retiring soon. Your risk temperament is based on what's going on in the world and what stage you are in using those monies."
One of the best ways to understand your ideal risk tolerance is to work with a qualified financial advisor who can help you tailor your investments to align with your goals, timeline and comfort level.
3. Diversify your portfolio.
The market is unpredictable, and the best investment in any
4. Use the dollar-cost averaging method.
If you're tempted to time the market, consider trying
5. 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
6. Rebalance your portfolio.
Does your current portfolio look the same as when you created it? Or is the mix of stocks, bonds and cash a little out of whack?
Review your investment strategy with a financial advisor
Market volatility can be hard to predict and difficult to navigate. During these times, having the guidance and support of a qualified professional can make a significant difference. Consider