Guide to Market Volatility

It is easy to get caught up in the news cycles when market volatility hits and begin to question your portfolio. Here are some valuable tips for managing market volatility that are useful for investors of all levels:

Stay Informed, But Don’t Overreact

Market volatility is not generally caused by a single source but a combination of factors:

• Economic Data: Changes in unemployment rates, inflation, and GDP growth can influence market movements.
• Geopolitical Events: Political instability, elections, or conflicts can cause uncertainty and market swings.
• Monetary Policy: Central bank decisions on interest rates and monetary policy often impact investor sentiment.
• Investor Sentiment: Market psychology plays a significant role in driving short-term volatility.

Stay Informed:

• Keep up to date with reliable financial news sources but avoid the temptation to make hasty decisions based on headlines alone. Volatility is often short-lived, and reacting impulsively can lead to poor investment decisions.
• Avoid sensationalist sources and doomsday.

Stick to Your Investment Plan

It’s times like these why we review your risk tolerance and risk capacity within your plan with the goal of sticking to your plan through thick and thin.

Revisit Your Goals:

• Long-Term Focus: Remember that most investment plans are designed with a long-term horizon in mind. Short-term volatility should not derail your long-term goals.
• Short-Term Goals: Short term goals should not be invested heavily in the stock market due to volatility.
• Risk Tolerance: Review your risk tolerance to ensure it aligns with your current portfolio. If market movements are causing undue stress, it is a good time to re-review your risk tolerance for future adjustments. 

Asset Allocation:

• Diversification: Diversification can help reduce the impact of volatility on your overall portfolio. At Gilbert Wealth, I practice wide and broad diversification. 
• Rebalancing: Market volatility is a time to look at rebalancing as markets overreact to news. This may involve selling assets that have performed well and buying those that have underperformed, ensuring that you stay aligned with your investment strategy.

Avoid Emotional Decisions and Psychological Traps

Unfortunately, our brains work against us in events like this. Here is what you need to know about yourself.

 Avoid Pegging to Market Highs:

• Anchoring Bias: Many investors anchor their expectations to market highs, feeling that any decline is a loss. This can lead to disappointment and irrational decisions. Instead, focus on your overall financial goals and the long-term growth of your portfolio rather than constantly comparing it to its peak value.
• Reframe Losses: Understand that market corrections are normal. Reframing these periods as opportunities to buy quality assets at lower prices can help shift your mindset from fear to strategic thinking.

Understand the Power of Loss Aversion:

• Loss Aversion Bias: Studies show that the pain of losing is psychologically twice as powerful as the pleasure of gaining. Recognizing this bias can help you avoid overreacting to market dips. Focus on the bigger picture and the progress toward your long-term financial goals rather than short-term losses.
• Panic Selling: Selling during a market downturn locks in losses and prevents you from benefiting from any subsequent recovery.

Practice Emotional Detachment:

• Mindfulness and Perspective: Regularly practicing mindfulness can help you detach emotionally from market fluctuations. Remind yourself that short-term volatility is a normal part of the investment journey and that maintaining a long-term perspective is crucial.
• Limit Portfolio Check-Ins: Frequently checking your portfolio during volatile times can heighten stress and lead to impulsive decisions. Consider setting specific intervals for reviewing your investments, such as quarterly, to avoid unnecessary anxiety.

Focus on Opportunities

Dollar Cost Averaging and Investing Cash

• Low priced markets are the best times to put money to work. If you’ve been sitting on cash, consider putting together a plan to invest. If you’re already dollar cost averaging, keep the plan going. Don’t stop now!

Roth Conversions

• Declines in the market could be an opportune time to convert a Traditional IRA to a Roth IRA. You may pay less tax on the conversion since the value of the assets is lower, and any future growth in the Roth IRA can be tax-free.

Tax Loss Harvest

• If you hold taxable investments and now have a loss, consider tax-loss harvesting those positions to at least get some tax benefit from the decline.

Maintain a Healthy Perspective

History of Market Recoveries:

• Remember that markets have historically recovered from downturns, often reaching new highs over time. Staying invested through volatility can be beneficial in capturing the full upside of market cycles.
• Here is a long-term chart of stocks and bonds to 1935. Each of those downward sections were scary when they were happening but in the long run ended up being just blips in the general trend.

The Big Picture by CRSP (investmentsillustrated.com)

Focus on What You Can Control:

• The above chart is not a guarantee, and no one can control the markets, but you can control your reaction to them. Focus on maintaining your investment discipline, managing your emotions, and staying aligned with your long-term financial goals.
• The success of your long-term financial plans are not solely based on the market always going up and never experiencing market drawdowns. With a comprehensive financial plan, we plan for markets being down just a much and the markets being up.