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Guide to Navigating Market Volatility at Every Age

Guide to Navigating Market Volatility at Every Age

While volatility has always been part of the stock market, 2020 has certainly brought a lot of uncertainty in the market and the world at large. If you’re feeling anxious about your investment portfolio or worried you’re on the wrong track, rest assured that these feelings are a natural reaction to market volatility. However, that doesn’t mean you should act on them. In this comprehensive guide to dealing with market volatility at every age, we’ll break down the do’s and don’ts of investing for the long-term. If you have any questions, our Prince William and Fauquier County-based wealth management professionals are happy to help!

20’s – 30’s

Don’t make the mistake of sitting out the stock market in this phase of life. It’s the best time to buy low and, the earlier you start investing, the more growth you’ll see over time.

Don’t Fear Volatility

During your first decade or so in the workforce, time is on your side. In your twenties and even your thirties, you still have the opportunity to buy low without worrying about living off your retirement account any time soon. This will put you in a position to take advantage of upswings when the market inevitably turns around.

So, don’t wait for the stock market to settle down before you start investing. This is a good way to miss out on a chance to buy investments at “sale” prices, which could pay off in returns once the market begins to stabilize again.

Time is on your side – buying investments at “sale” prices could pay off in returns once the market swings up again. ¬

The best approach to investing is to set up automatic contributions on a weekly, bi-weekly, or monthly basis. This means you’ll buy low when the market is down and high when it’s up, and ultimately it should work out in your favor because you’re playing a long game and not reacting emotionally to temporary fluctuations.

Finally, the principle of compounding interest is one of the most important things to understand about navigating market volatility in your twenties and thirties. While you don’t earn interest specifically on your stock market investments, you can earn dividends, which are payouts from companies to investors after a particularly good earnings quarter. Also, stock prices tend to go up over time, meaning the stock you buy now can increase in value, thus increasing the value of your overall portfolio and the price you could sell your stock for. When you reinvest your dividends and any profit from increased stock prices, you can make even more profit, making it easier to grow your balance over time.

Get Your Finances in Order

The more you can get your finances in order now and put together a financial plan, the greater your potential benefits in the long-term. For example, you could reduce the total interest you pay on debt, benefit from flourishing stock markets, and stay financially prepared for unexpected expenses and emergencies. Here are three important steps you can take to get your finances in order:

  • Pay down as much of your debt as possible. If you have student loans, credit card debt, and other types of unsecured debt (i.e. not a mortgage), work hard to pay them off now so you don’t drag your debt into later stages of life, such as buying a house or raising a family.
  • Build an emergency fund. The general rule of thumb is to have enough cash to cover 6 to 12 months’ of bills and household expenses set aside in a savings account in the event you have to face unemployment or another type of emergency.
  • Open a retirement account. You should be contributing to your employer-sponsored retirement account at least enough to get the full match. If you don’t have a 401(k) through your job, you can open your own Individual Retirement Account (IRA) for tax-advantaged savings.

Invest For The Long Term

When the market goes down or seems to be fluctuating a lot, it’s natural to panic and want to pull your money out. However, you shouldn’t make any unnecessary changes. Instead, take the long view and focus on saving aggressively and putting any extra money towards retirement.

Avoid reacting with emotion to market changes when there’s fluctuation. Look at the big picture of your long-term investment plan.

Practice Dollar-Cost Averaging

This is an investment strategy in which you regularly purchase an asset at a fixed dollar amount. For example, the regular recurring contributions mentioned above. You could end up buying certain investments at a discount during periods of market underperformance.

40’s – 50’s

For many people, this stage of life overlaps with your prime earning years. Take advantage of higher income by saving as aggressively as possible.

Get Ahead Of Market Volatility

Remember the lessons from the previous section: investing is a long game and you don’t want to react emotionally to a volatile market swing. Instead, focus on stashing as much cash as possible in your retirement account, while it still has a few decades to compound.

Diversify With Safer Investment Options

If you’re concerned about your asset allocation during a volatile market, you could diversify your portfolio into safer investment options such as bonds, bond mutual funds, CDs, and Money Market accounts. However, we recommend consulting with a wealth management professional before making any big changes to your investment portfolio.

Review your portfolio with a wealth management professional to make sure your investments are aligned with your target asset allocation.

Consider Additional Principal-Protecting Options

Consider an annuity or additional life insurance, especially if you have a family that is dependent on your income.

Strategize For Retirement

If you’re worried about having enough money for a comfortable retirement, there’s still time to make changes. For example, you could stop saving for a child’s college education in order to reallocate that money to your retirement account. These choices are hard to make, but most financial experts will tell you to prioritize your retirement savings over college savings. Children can always take out student loans and work their way through college, but you will have few options if your retirement account comes up short.

Reallocate funds from saving for a child’s college tuition to prioritize retirement savings instead if necessary.

60’s – Retirement

Finally, the retirement you’ve been planning for years is now on the horizon. Your focus in your remaining working years should be on protecting and preserving your assets so they can last throughout your retirement.

Create A More Risk-Averse Investment Strategy

Review your current asset allocation with a wealth management professional. Sometimes it makes sense to reduce the percentage of stocks in your portfolio in order to reduce your risk level as you move towards retirement.

It’s also a good idea to set up three buckets of money to carry you through each phase of your retirement:

  • 5-year bucket: Short-term cash to fund immediate needs.
  • Intermediate bucket: Money invested in a moderate risk portfolio that can continue to grow over the next 6 to 15 years.
  • Long-term bucket: More aggressive investments that won’t be touched for 16 years.

Focus on protecting and preserving assets with a risk-averse investment strategy and finding income-producing opportunities.

Seek Out Other Income-Producing Assets

Set up multiple streams of income for better protection against financial instability. This could include investment properties, dividend-paying stocks, and/or variable annuities.

Best Practices For All Life Stages

  • Don’t make any spontaneous decisions or changes. Talk to a wealth management professional to discuss your financial goals and concerns before making any rash decisions, especially decisions related to retirement savings or investments.
  • Don’t make early withdrawals. If you take an early withdrawal from your 401(k) before age 59.5, you’ll pay ordinary income taxes and a 10% penalty. Withdrawing money early also forfeits tax-advantaged growth and can trigger a higher tax bill.
  • Reassess and rebalance on a regular basis. Whether it’s quarterly, semiannually, or annually, make a standing appointment to review your investments and assets to ensure your finances are where you want them to be.

 Understanding the do’s and don’ts of navigating market volatility from your 20’s all the way through retirement will help you make the best financial decisions for the future.

TFB’s Wealth Management Team is Here to Help!

Whatever stage of life you’re in, we can help you navigate market volatility and stay on track to meet your financial goals. At TFB, we offer a variety of wealth management services including Virginia-based wealth management professionals. We also offer personal checking and savings accounts to help with all your cash management needs. To learn more about how we can help you, contact us today!