Over the past few weeks, many of our clients, friends, and family have asked what investors should be doing about all this volatility. So, I thought I would write down the Five Do’s and Don’ts During Times of Market Volatility.
1. DON’T panic and make emotional decisions. During times of uncertainty or fear, humans are prone to make decisions based on our “fight or flight” response. This is true even of our financial decisions!
When market volatility strikes, many make knee-jerk decisions simply, so they feel like they are doing something. So, they can feel “in control.” But think about when you’re driving a car and you see an animal in the road. What happens when you jerk the wheel? Yep – you’ll probably overcorrect and increase your odds of crashing. The same is true with your money. Emotional decisions often tend to do more harm that whatever it is we’re reacting to!
2. DO think long-term. Investing, by its very nature, is a long-term activity. Even people in retirement are investing in the market for the long-term. That’s why, while down markets (referred to as a bear market) are uncomfortable, they’re also somewhat overrated. Markets fall over days, weeks, and sometimes, months. But history has shown that they rise over the course of years and decades. Of course, what has happened in the past is never a predictor of what will happen in the future.
To return to a driving analogy, think of the last time you were caught in a traffic jam. You’re sitting there, idling in traffic, when suddenly, the lane next to you starts to move. So, you quickly merge into that lane, only to get stuck again. Meanwhile, the lane you were just in is now moving…and all the cars that were once behind you are now speeding ahead.
Maddening, isn’t it?
When bear markets hit, investors often panic. Instead of sticking to their long-term strategy, they sell, sell, sell – at a time when everyone is selling. In other words, they try to change lanes in the middle of a traffic jam.
But again, you should only have funds invested in the stock market that you won’t need for at least five to ten years, long-term. The road we’re on stretches for miles. Sometimes, the speed limit is 75 miles per hour. Sometimes, it’s only 25. Trying to take shortcuts may lead to problems.
3. DO think about your current asset allocation and risk tolerance. Market volatility is a good time to determine whether you are invested the way you should be, given your age, financial goals, and ability to take on risk. Generally, younger people can often afford to weather extreme volatility more than older people who are close to or in retirement.
Look at your portfolio to determine whether it’s time to take advantage of current lower prices to dollar cost average some of your holdings by purchasing more at a lower current price and keep your target asset allocation in place.
But also evaluate your portfolio to determine if it’s time to move into more conservative investments that leave you less exposed to the kinds of swings you’re experiencing in the stock market. And remember you can always ask a professional for a second opinion if you’re unsure!
4. DON’T look at your portfolio each day and stress about every dip in the stock market. One of the worst mistakes investors can make is to obsessively check how their portfolio is doing. The markets are like a person’s body temperature – they are constantly rising and falling.
Just as you probably don’t take your temperature every day, you don’t need to do that with your money, either. Again, think long-term, not short. Prioritize your overall financial health over the day-to-day.
5. DO set up an emergency fund if you haven’t already. Like market volatility, economic recessions are inevitable. Sometimes they affect us, and sometimes they don’t. There’s no way to see the future, but we can prepare for it.
Setting up an emergency fund, with enough money inside to cover three-to-six months’ worth of living expenses, is always a good idea. Having emergency funds, that nest egg, can give you piece of mind.
Market volatility is never fun, but it is a normal part of investing. So long as we remember to think long-term and rely on rational thought over emotion, we can continue working towards goals and dreams.
And that is what investing is all about.
If you ever have any questions or concerns about the markets, please feel free to contact us. We are always happy to chat!