Volatility is part and parcel of the stock market. Try as we might to navigate these ups and downs, there’s always an element of unpredictability, whether due to geopolitical tensions or regular economic cycles. The good news is, with the right strategies, you can withstand volatile periods and safeguard your financial future. In this post, we’ll explain how.

Join us to have information like this delivered to your inbox. 

What is Market Volatility?

Market volatility refers to the frequency and magnitude of price movements in the financial markets. It’s measured by the Volatility Index (VIX), which reflects investor sentiment and market expectations. High volatility signifies significant price swings, often leading to a higher level of uncertainty and risk.

Market Volatility’s Impact on Retirement Savings

It may or may not come as a surprise that market volatility can have a profound impact on retirement savings. The value of retirement accounts, such as 401(k)s and IRAs, fluctuates with market conditions. Here’s an in-depth look at what this entails.

Portfolio Value Fluctuations

Volatility causes sharp rises and drops in asset prices, leading to fluctuations in the overall value of retirement portfolios. In the short term, this can stir anxiety among savers as their nest egg may temporarily lose value.

Sequence-of-Returns Risk

Timing is everything when it comes to maximizing your retirement savings, and unfortunately, starting your withdrawals during a market drop can kickstart a long-term decline. This phenomenon, known as sequence-of-returns risk, can reduce the longevity of your retirement fund, potentially draining it early.

Impact on Asset Allocation

Investors tend to make emotional decisions during periods of high volatility, and this can spell disaster for their retirement accounts. While it may be tempting to move assets out of stocks and into bonds or cash during downturns, this can limit long-term growth, as lower-risk assets generally come with lower returns.

Mitigating Risk During Periods of Market Volatility

Market volatility is inevitable, but there are a few ways you can secure your finances and make it past these bumps in the road. Here are some strategies for mitigating risk.

Diversify Your Portfolio

Building a diversified portfolio is one of the best ways to manage market volatility. By spreading investments across various asset classes, such as stocks, bonds, and real estate, you can reduce the impact of a downturn in any single market. 

Keep a Long-Term Perspective

Consider the big picture, not just the current state of the market. Historical data shows that, despite short-term fluctuations, the market tends to recover and grow over extended periods. Focusing too much on the present can lead to emotional reactions, such as panic selling or abandoning a well-thought-out investment strategy.

Instead, look to your long-term investment horizon. What are you hoping to achieve over the course of your investing life? How might the actions you take today impact your financial stability tomorrow? It’s important to ask yourself these questions before making any hasty moves.

Use the Bucket Strategy

Think of the bucket approach as separating investment assets into different buckets based on order of importance and living needs. The idea is to keep short-term funds (those you would use for basic living expenses) as cash and long-term funds in a diversified investment portfolio. Here’s how this works: 

  • Bucket 1: The first bucket contains highly liquid funds to be used for immediate living expenses. It should include a year’s worth of funds––two if you want to be really conservative. You might also consider adding an emergency fund to this bucket.
  • Bucket 2: Your medium-term bucket should contain five or more years’ worth of living expenses, striking a balance between stability and income generation. You can pour from this bucket into the first as needed.
  • Bucket 3: Fill Bucket 3 with your long-term investments such as stocks and volatile bonds. The idea is that you won’t have to tap into this one for a while, so you have more freedom to play it risky.

As with any investment strategy, you will likely need to adjust your buckets from time to time as your needs evolve. The key is to maintain a steady holding of short-term, accessible income while continuing to generate growth through long-term assets.

Expect the Unexpected

You’ve probably heard it a million times, but it’s always better to be safe than sorry. Preparing now for periods of market volatility can make all the difference in the world when the storm hits. Before making any investments, be sure to build a solid emergency fund with three to six months’ worth of living expenses. 

Check your insurance coverage and address any gaps. Any number of health problems can pop up as you near retirement, and the last thing you want to be dealing with during a volatile market is a surprise hospital bill that you cannot easily cover. Get your ducks in a row before they’re swept away by the winds of market volatility.

Weather Market Volatility With These Tips and Tricks

Market volatility is an inescapable part of investing, but knowing your enemy, so to speak, can help mitigate risks. Stay informed and proactive in managing your retirement savings, and consult with a financial advisor to tailor these strategies to your unique situation.  

To have information like this delivered to your inbox, consider joining us. 

 

Founded in 2010, our services include boutique hedge funds, separately managed accounts, financial planning, estate & trust services, private placements, life insurance and annuities, and in-house concierge services for high-net-worth individuals, families, and businesses. To find out more about our services or reach a registered investment advisor, please fill out the Contact form.

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk, including the loss of principal.