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Handling Market Volatility When Your Money Is at Stake

By Jane Leibbrand

Investors went on a wild ride in 2018. There were exciting highs and deep descents; your money was on a roller coaster, and your reactions may have been, too. The Dow swung 1,000 points in a single session five times in 2018—out of only eight times since its inception.1

The S&P 500 zoomed to a record high in September 2018, but many remember December with a shudder: In one seven-day period, the Dow fell six times by at least 350 points. For the year, the S&P 500 was down 6.2 percent and the Dow by 5.6 percent.

But then came 2019. By the end of February, the S&P 500 was up 10.84 percent and the NASDAQ Composite Index was up 13.18 percent.2 Whew! Market volatility has continued in 2019 and is expected to continue for some time.

What drives market volatility? Just about anything. New economic data, earnings reports, interest rate changes, political change, and numerous other factors. What can you do to protect your nest egg against market volatility, and what should you do when it occurs? Following are important tips to keep you grounded during periods of market instability.

Invest Regularly and Stick to Your Plan

“The market is a living, breathing organism. It fluctuates in nanoseconds; by nature, it’s normal for the market to experience volatility,” says Brandon Aber, senior associate, retirement counselor at CAPTRUST. Millions of buyers and sellers are trading constantly. “The continual fluctuation is out of your control. Instead, look at how your portfolio is positioned to better handle volatility when it does occur,” Aber advises.

“We’re all emotional when it comes to money. It’s easy to get excited when the market goes up and anxious when it goes down,” says Aber. “As long as you’ve consulted with your financial advisor in designing an account with a mix of assets that align with your goals, time horizon, and your tolerance for risk, you’re better positioned to ride out market volatility.”  

What’s important is that you have a sound financial plan and you’re investing regularly with every paycheck. Dollar-cost averaging, the systematic way you purchase investments in your retirement plan, is a great way to invest for the long term and is a major benefit of contributing to your employer’s retirement plan. You buy shares of various investments with every paycheck.

When the market is down, you’re able to purchase more shares at a cheaper price. When the market is up, the shares you purchase are more expensive, but the cheap shares have increased in price. You’re steadily increasing your nest egg, which helps prevent you from trying to time the market. There’ll be upticks and downturns constantly, from week to week and month to month.

Over the decades, there will be significant downturns, but a historical look at the stock market tells us that what goes down will come up again. “No one—not even experts—can time the market perfectly. Sticking with your financial plan and making regular contributions help prevent you from taking money out of the market at the wrong time,” says Aber.

Be Prepared: Know Your Tolerance for Risk

Working with a financial advisor helps you determine your tolerance for risk. It’s not healthy to feel anxious every time there’s a slight downturn; a week, a month, or six months later, there’s likely to be a significant turn upward. Your advisor works with you to create a portfolio that doesn’t keep you up at night. The number of years before you need the money and your tolerance for risk provide parameters for designing your mix of assets. 

Figure One shows four different portfolios, from conservative to aggressive. If you’re 24, you can afford to be an aggressive investor if you’re comfortable with the highs and lows that go with it. If you’re 55, you’ll need a more balanced portfolio to protect against a downturn that could eat away many of your gains. Meeting with your financial advisor on a regular basis—at least once a year and more frequently as you near retirement—helps ensure that your portfolio is appropriate for your time horizon and future needs.

Figure One: Choosing the amount of stocks you are comfortable with

Source: Fidelity

Diversify, Diversify

Financial advisors agree that the most important rule in long-term investing—and part of having a sound financial plan—is diversification. Appropriate asset allocation—having assets in different investment categories such as stocks, bonds, real estate, and cash—helps reduce risk and protects your entire portfolio against market volatility and severe drops in one category.

“We don’t know what investments are going to be the best performing in a particular year,” says Aber. “No one has a crystal ball.” Some investments will outperform, while others will lag. That’s why Aber likes the old adage, “Don’t put all your eggs in one basket.” The investments that do well are going to support your portfolio against the ones that slide.

It’s important to diversify not only among investment categories but also within a category. Take stocks, for instance. General classifications within stock investments include large-, mid-, and small-cap funds, all of which can also be growth or value oriented.

The different classifications of funds may react differently to market conditions during the same time period. Take large-cap versus small-cap funds. Large-cap funds are composed of blue-chip companies and usually have a market capitalization value of more than $10 billion. Right now, many of these companies have significant exposure to international trade tensions—think of Ford and General Motors. “Smaller companies, usually with a market cap of less than $1 billion, typically do not have as much exposure to international tensions. If you add in other economic variables like the recent tax reform and changing interest rates, investors will see that small companies and large companies can react very differently given the economic landscape,” says Aber. 

Diversification within the stock category in a long-term investing plan may include a low-cost index fund that tracks the S&P 500, supplemented with an international fund and a mix of large-, mid-, or small-cap growth and value funds as your portfolio grows.

If certain types of individual stocks appeal to you, sector stock funds or broad-basket index funds are safer than investing in individual stocks. Remember Enron when the bubble burst and the WorldCom bankruptcy in 2002? A broad-based technology, consumer staples, or other sector fund is going to be the best choice for the average investor. 

Bonds are an important category of investments for your portfolio because in general they’re much less prone to the huge swings that characterize the way the stock market can behave. Thus, they’re considered a safer investment. During the same market conditions, they may react differently than stocks, so while your stock portfolio may be taking a plunge, your bonds may be gaining while steadily generating income. Bonds are a great cushion against stock market wild rides.

Investing in a real estate fund or a real estate limited partnership (REIT) may provide ballast to your brokerage and/or 401(k) when the market is in turmoil. Yes, the value may decrease during a recession (think of the housing market during the Great Recession in 2008–2009), but the population rate is growing, and people always need a place to live. 

What about cash? While cash was the best performer in 2018, it was the worst in 2017.3 Cash really comes into play in a 401(k) retirement account when you’re planning to retire. Before you stop working and generating income, it’s prudent to move two to three years of living expenses into cash if passive income from investments isn’t enough to cover them. This way, you can ride out market volatility. If the market suddenly goes down, you have enough money at hand to cover your essential costs of living and won’t need to sell shares in a stock fund when it’s beaten down.

When Volatility Happens, Keep Calm and Carry On

What should you do during a period of market volatility? Aber says, “Take a deep breath. The worst time to make a move is during a time of volatility.” Prepare yourself psychologically for volatility by understanding that it’s part of the essence of the market. As the British say, “Keep calm, and carry on.”

Avoid the habit of looking at your investment account every day. Put an appointment on your calendar to check it every six months or quarterly. It’s easy to become too focused on day-to-day returns, which can really increase anxiety when the market is experiencing greater than normal volatility. Instead, “keep your eye on your long-term investing goals,” says Aber. “Think of the positive aspects of investing: you’re diversified, you’ve found your risk tolerance for investing by working with your financial advisor, and your investments are appropriately positioned for your future needs. That’s what you can control.”

The Silver Lining in a Down Market

No one feels good about losing money in a downturn, but if you’re in it for the long term, you’ll very likely benefit, because the shares you buy with each paycheck are going to be much cheaper during the downturn, and your monthly contribution buys more of them than when the market is high. Downturns do end, and when they do, the market has experienced its biggest surges, as shown in Figure Two, below.

Figure Two: It has paid to stay invested in U.S. stocks during troubled times

Source: Fidelity

You probably remember the Great Recession in 2008–2009. If you had taken your money out of the market—which some people did—and not put it back in, you would have missed the first six months of 2013, when the market gained more points than in any year ever recorded.4 If you decided to jump in then, you’ve ended up selling low and buying high. “That’s why it’s so important not to let your emotions and fear overtake you,” says Aber. Instead, use positive self-talk; tell yourself it’s the nature of the market to be volatile. If a recession comes, you and your financial advisor have developed your portfolio to account for the possibility.

1 CNN Business, “2018 Was the Worst for Stocks in 10 Years” December 31, 2018.

Thrivent Mutal Funds, “February 2019 Market Recap: Edgy Stock Market Still Gains Ground in February,” March 4, 2019.

The Street, “Diversification is about More Than Just Stocks and Bonds,” January 25, 2019.

The Balance, “Stock Market Crash of 2008,” November 6, 2018.

Have questions? Need help? Call the CAPTRUST Advice Desk at 800.967.9948 or schedule an appointment with a retirement counselor today.

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