5 steps you can take when the market is volatile
While it’s essential to maintain a proper perspective during these periods, there are steps you can take to help you better prepare for market volatility in the future.
1. Establish or revisit your financial plan
A financial plan is “the foundation of investing,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. Freedman emphasizes that sticking with a plan helps avoid the desire to move money in an out of the market in reaction to price changes. “Investors often find that market timing doesn’t result in a favorable outcome.”
As you create or review your plan, here are specific actions to consider:
- Take a closer look at your financial goals and your time horizon to reach those goals. If they’re no longer realistic, make adjustments so you can stay on track to meet your most important goals.
- Review your monthly budget to assure you’re comfortable with your income and expenditures. You want to be able to cover essential expenses at all times.
- If necessary, try to identify ways to set additional dollars aside toward your most important financial goals.
2. Bolster your emergency fund
Your emergency cash savings serve as a financial cushion through difficult times or to help you meet unexpected expenses. The conventional wisdom is that you should have the equivalent of three-to-six months’ worth of income readily available to tap for an immediate need should it arise.
If your income is subject to greater fluctuation in economically challenging periods or just by the nature of the work you do, consider bumping up your emergency cash cushion to six-to-nine months or longer. It will provide greater financial flexibility to help you get through challenging periods.
3. Re-assess your risk tolerance level
Your investment strategy is derived in large part from the level of risk you’re willing to take. From time-to-time, you’ll want to reexamine your views on investment risk.
Answers to these questions can help you more accurately assess your risk tolerance level:
- Are you willing to accept moderate losses in your investments over a period of time and demonstrate the patience needed to overcome those setbacks? If you are, you could position your investments in a portfolio mix that may endure more significant short-term volatility, but with the potential opportunity for higher, long-term returns.
- Do you become uncomfortable and nervous about your portfolio during down markets? If so, you may want to reduce the amount of risk in your portfolio and choose a more conservative portfolio mix. For example, investors may be able to take advantage of today’s higher bond yields to build a portfolio positioned to generate a more competitive income stream. That may allow them to position more assets in bonds and manage risk more conservatively by reducing equity positions.
- What is your time horizon to retirement? If you’re nearing retirement age (within five years or less), you may want to scale back the amount of risk in your portfolio to avoid any significant losses that could occur just before or once you’re in retirement. By contrast, if you’re 20 years or more away from retirement, time is on your side. You may be in a better position to take on more risk in order to potentially earn a higher return and ride through the market’s challenging periods.
4. Make sure your portfolio is properly diversified
A diversified portfolio that better weathers market volatility begins with owning an appropriate mix of investments aligned with your risk tolerance level. The mix of assets you hold should represent three broad investment categories – stocks, bonds and cash. Diversify further within each category through different investment types.
With stocks, you may want to include small-, medium and large-cap stocks along with international stocks. You may want to include some combination of growth and value stocks, as well as specific industry sectors in your asset mix. With bonds you may want to consider government bonds, corporate bonds, and bonds of different maturities.
“In the current environment, economic trends such as GDP growth, inflation and interest rates seem on a relatively stable course,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “It’s leading many investors to maintain a rather neutral weighting in their asset allocation mix.” For those who still have a sense of caution about the stock market, “a dollar-cost averaging strategy is an effective way to help mitigate the risk of short-term market volatility when you put money to work in assets that can fluctuate in value,” adds Haworth.
Reassess your portfolio at least annually to determine if it would be beneficial to make any adjustments. As your portfolio rises or falls in value due to varied investment performance, you may want to rebalance it to ensure it remains aligned with your primary objectives.
5. Talk with your financial professional
In the near term, investors should prepare for additional market volatility. “The markets are likely to continue the up-and-down pattern we’ve seen in the early months of 2024,” says Haworth. An experienced financial professional can review your current plan or guide you through the process of developing a plan to help you gain confidence that you’re on track toward your financial goals.
Even if you’re currently comfortable with your plan and investment portfolio, the economic environment can quickly change. A financial professional can help assess your circumstances and calibrate your plan as necessary to either help protect your financial position or take advantage of new market opportunities.
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