One of the foundational truths of investing is this: when there is uncertainty, there will be volatility in the stock market. The news media preys on any bit of uncertainty they can to induce fear-mongering and hold our attention, a tactic which has become even more severe in the last several years. Many times it can be hard to even decipher what is actually true! That's why it's extra important to stay level headed and not allow narratives to control our emotions and investment decisions. There will always be a spotlight on areas of uncertainty - and right now it is fixed on rising interest rates, the failures of a select few banks (that made terrible investment decisions, by the way), and the upcoming debt ceiling deadline. While the market overall is positive year-to-date, we've still been seeing lots of turbulence largely due to anxiety around these issues. Whenever this happens, it's natural to wonder if you should be taking action. Here are the actions that you should (and shouldn't) take:
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 their “fight or flight” response. Yes, this is even true of our financial decisions! When market volatility strikes, many people make knee-jerk decisions simply so they can 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. Knee-jerk, or emotional decisions, often tend to do more harm than whatever it is we’re reacting to! So, when making a decision, always ask yourself, “Why am I doing this? Do I have a specific reason, or is it just because I feel like I have to do something?”
2. DO think long-term.
Investing, by its very nature, is a long-term activity. Even people who are close to retirement are still investing for the long-term. That’s why, while market volatility is uncomfortable, it’s 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. That’s good, because you’ll probably be investing for years to come!
To return to my 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. Frustrating, isn’t it?
When volatility hits, investors often panic. Instead of sticking to their long-term strategy, they sell, sell, sell – at a time when everyone is selling. This means they are selling low. In other words, they try to change lanes in the middle of a traffic jam. Again, we’re in this for the 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 just leads to longer delays.
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 speaking, younger people can often afford to weather extreme volatility more than older people who are very close to retirement. So, look at your portfolio to determine whether it’s time to move into more conservative investments that leave you less exposed to big market swings. And remember that you can always ask me for a second opinion if you’re unsure!
4. DON’T look at your portfolio each day and stress over every dip in the stock market.
That said, 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 and a perfectly normal part of the economic cycle. Sometimes they affect us, and sometimes they don’t. Surprisingly, they don't even always mean the stock market will go down! While there’s no way to see the future, we can prepare for it. Setting up an emergency fund with enough money to cover around three-to-six months’ worth of living expenses is always a good idea. But be careful not to hoard extra cash above and beyond what you need for emergencies! Because of the inflation we're experiencing, you will just be losing buying power with cash and can get a better return on your money in smarter places. For example, short-term Treasury Bills are one of the safest investments out there and will likely give you a much better return than your bank interest rate right now. We can help you understand the different options you have to make sure your cash is being put to work in a way you're comfortable with.
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 ration over emotion, we can continue working towards our 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.