Market volatility isn’t unusual, but that doesn’t mean it’s welcome. What can you do when it happens to help protect your financial goals?
Quick takeaways
In the past 150 years in the United States, market volatility has accompanied all sorts of events, from wars to pandemics and business downturns. In fact, if you watched the markets closely every day, you’d see that they constantly move up and down … and up and down.
So, what is market volatility? Simply put, market volatility is a period of more dramatic or rapid highs and lows in the markets. But even the worst market declines have generally been followed by a significant recovery. For example, since 1956, the average bear market (a period of decline) has lasted 14 months with an average decline of about 36%. Bull markets (periods of growth), in contrast, last around 69 months and deliver average returns of 192%.
Nonetheless, volatile market cycles, be they short and sharp or sustained and gradual, might cause you to worry. Here’s an explainer of what you can do when it (inevitably) happens.
Wanting to act when something happens is natural. When it comes to market volatility, those actions must take into consideration the impact on your financial planning, both today and in the future. Here are some ideas.
Ever heard the adage, it’s not timing the market, it’s time in the market? That’s because periods of decline are typically followed by longer periods of growth. Jumping out of the market when it goes down or is volatile may decrease your savings long-term. It also creates a conundrum: When will you know to get back in? And during downturns, your savings equal an opportunity to buy investments at a lower price. Instead, consider that inaction may be the best form of action. If you stay the course, the bumps are likely to smooth out on their own over time.
No matter your timeline, there are actions you can take now—regardless of what the markets are doing—to help improve your financial situation.
Ideas include:
Short term
- Keep saving and investing. Regular contributions to a retirement account, for example, can actually benefit you during a market downturn—it’s like buying investments on sale.
- Review day-to-day finances such as fine-tuning your budget and building an emergency fund.
- Make a plan to pay off debt, especially high-interest credit cards.
Long term
- Create a list of long-term financial goals such as buying a house, paying off a mortgage, or starting a business.
- Envision your retirement. Market volatility is what’s happening at the moment, but retirement savings benefit you in the future.
Risk tolerance is how you emotionally endure losses—how nervous market volatility makes you. But there is another important factor: risk capacity. Risk capacity is how much investment risk you can realistically take on based on factors like your age and time to retirement.
For example, younger investors can often take on more risk because they have more time to recover from market downturns, while investors nearing their financial goals may need a more conservative approach because they have less time to wait for a recovery.
Want to better discover your risk tolerance and capacity? Use this seven-question risk profile quiz (PDF). Use your results to help ensure you’re matching your risk profile with your investment strategy.
Investing extra income from a raise, a tax refund, or a portion of a bonus are budget-friendly ways to boost retirement savings. Market volatility doesn’t impact them.
If you already have an employer-sponsored retirement account, think about opening your own traditional individual retirement account (IRA) or Roth IRA. If you add a lump sum to an account during a valley in market activity, you’re also buying low, meaning you’re getting more for your money. And, an IRA travels with you, no matter the job you have.
Consider each investment you hold through the lens of how it fits into your asset allocation and your tolerance for risk—whether it's an individual stock or bond, or a basket of securities like a mutual fund or exchange traded fund (ETF). Because different investments do not all perform the same way at the same time, asset allocation can help balance risk by allowing stronger-performing investments to offset those that may be underperforming.
If this concept sounds overwhelming, there are options that take the decision-making burden off you. Target date funds and managed account services (both generally available within retirement accounts like 401(k)s and IRAs) turn some of the responsibility of researching, investing, and rebalancing over to a professional.
A financial professional’s job is to understand what’s going on in the markets and translate that to you. That knowledge, combined with their understanding of your unique risk profile and goals, makes them a resource in times of volatility.
