It’s been said that volatility is a tax that investors have to pay for harnessing the wealth-building power of the financial markets. But rationalizing market fluctuations doesn’t make them any less nerve-wracking, especially if you’re nearing retirement age.
Some investors react to volatility like they’re living in the path of a hurricane. They board up the windows, gather the essentials, stay put, and hope the storm passes without hitting too hard. Others may get nervous and want to sell some investments and move the proceeds to cash.
The truth is, if you have prepared appropriately for market volatility, then normal market fluctuations shouldn’t be a concern and you should continue living your life and spending your money as you usually do.
Now, not everybody has “prepared appropriately.” Here’s a three-point checklist to see if you have done the work necessary to keep your finances on track regardless of what the financial markets throw at us.
1. You have a financial plan that covers all your bases.
No financial plan is totally immune to market fluctuations. But by diversifying your investments across stocks, bonds, and other financial vehicles, we’re confident that no single market event is going to jeopardize your long-term security. We use both long and short-term investment strategies or “buckets” to invest your savings depending on your age, goals, and how close to retirement you are.
This combination of diversified assets, liquidity and healthy savings gives you stability. It also provides flexibility that we can use to address potential problems or to take advantage of opportunities that might benefit your overall portfolio.
Where you have the most direct control over your finances is your personal spending. If you’re retired, it’s always important that you spend within the boundaries of your annual withdrawal plan. Younger investors might consider increasing their planned savings contributions during a downturn, especially if you’re counting on that money for a home or auto purchase in the near future.
In short: sticking to your plan and living within your means are two of the best financial moves anyone can make during market volatility.
2. You understand your relationship with money.
A big focus of our Life-Centered Planning exercises is to make folks more aware of what their relationship to money is really like.
For instance, early on in our process, we use interactive tools and discussions to identify how comfortable a person is investing in the markets. Some people are highly skeptical and think “the game is rigged.” At the other extreme are people who have a gambler’s irrational confidence in investing and love “laying their money on the line.”
Most folks fall somewhere in the middle. But market volatility can rouse some bad tendencies at both ends of the scale. Market skeptics might pull out their investments and shift too much portfolio weight to cash, bonds, CDs, and other low-yield options that cripple their long-term wealth-building. Gamblers might see “buy low” signs everywhere they look and get in over their heads.
Having someone in your life who understands your attitudes towards money is one of the biggest advantages of working with a fiduciary advisor. It is critical to have a professional who knows you, your history, and your goals to consult before you let bad news or scary headlines distract you from a well-thought out plan.
3. Your focus is long-term, not short-term.
It’s true that some current market indicators are flashing warning signs. Short-term interest rates are hovering near the same level as longer-term interest rates and that is sometimes a cause for concern about the direction of the economy over the next 12 – 24 months. Major stock market averages have experienced daily drops that, while not unusual, still grab your attention. And global trade disputes and political turmoil continue to unsettle investors.
But there are positive economic numbers to consider as well. The markets are still showing nice gains for the year. Unemployment is low. Job growth and economic output are still reasonable. And recent market dips have often been followed by rallies.
Investors who try to time their investments to these or any other economic signals are looking at market history through a dangerously narrow lens. The ultimate size of your nest egg won’t be determined by one week, one month, or even one year. True wealth is built up slowly, over decades of steadfast saving and investing, careful planning, and thoughtful rebalancing when necessary. Today’s losses might be tomorrows gains, or vice-versa.