Market turbulence: Please remain seated
Experienced investors know that periods of significant market volatility, just like airplane turbulence, although unwelcome and uncommon, are normal. And until recently, overdue, as we’ve communicated a number of times in Quarterly Context webinars posted here in this blog.
Market fluctuations are primarily driven by uncertainty and are unpredictably cyclical. While the reasons change, the most important question to ask is not why volatility is happening, but whether it is factored into your strategic plan. The answer, if you are using life-stage based investments, is yes. Whether it is a target date fund with automatic stock/bond mix changes over time, or a target allocation fund where you make the switch to the appropriate fund for each life stage, you will have reasonably appropriate stock/bond mixes, with better risk controls than low-diversification, higher-risk portfolios.
The right asset allocation or stock/bond mix strategy for long-term money is one that meets the long-term goals, and that has tolerable downturns. Tolerable doesn’t mean without periodic discomfort, but rather means that you are aware of the level of volatility that can occur, as discussed in investment education meetings, so you know the importance of staying the course and not panicking and getting out of the market.
Changes to your stock/bond mix should be based on your evolving needs and goals, not short-/medium-term news and fear. Long-term planning expects significant market fluctuations along the way and relies partly on econometric forecasting with expected ranges of returns. Despite recent volatility, returns remain within those ranges. Additionally if you are near or in retirement, significant near-term spending needs should already have been planned for by holding that money in a low-volatility design (such as a money market fund outside of your retirement accounts), or the spending may be small enough not to significantly affect goals.
Still, when stock markets drop precipitously, it can be tempting to react and forget the importance of remaining a disciplined investor. That is the fight/flight/freeze part of the brain trying to override the much larger rational part of the brain. However, just like it makes sense to keep your seat belt on during bumpy air travel, we advise staying seated for a successful financial journey. Running down the plane’s isle to take over the cockpit is only worth a try if there is no experienced team of pilots trained to avoid technical and emotional mistakes, that have successfully navigated storms before.
An emotional reaction may satisfy the urge to take action but often provides a false sense of short-term relief and can permanently damage long-term goals. Time and time again, research shows that staying the course provides better and more predictable long-term investment outcomes. It may help to remember that pushing forward and staying the course is an active, courageous and effective decision for the long run.
The bigger the drop, the bigger the opportunity in the form of upside potential on the other side. The biggest risk is not the market, it is locking in the losses and missing the recovery.
What’s next? The big and unclear tariff policy decisions driving current volatility are unnerving to individuals and businesses. Whether the underlying goal is to fundamentally change the global economy or is a negotiation tactic, or both, and whether any good will come from it, is unclear. Until clarity increases, volatility is likely. And that can involve big down days, or big up days. As we write this, the market is having a large up day, but that doesn’t mean the bumpy ride is over. Things may get worse before they get better, but it isn’t the first difficult market and won’t be the last. In the meantime, diversification is proving helpful.
The simplest advice is to carry on and know what you can control. You can’t control markets. You can control discipline and spending. This advice should come as no surprise, because it is time-tested. If your response is “Yes, I’ve heard this advice from you before, and it worked in the past… but I’m thankful for the reminder,” congratulations on being wisely comfortable with your discomfort. If that’s not your response, that’s also human… take a few deep breaths to cool the fight/flight/freeze response, watch an education video on WealthStep.com, and do your best to focus beyond the short-term turmoil.
Remember as well that when markets are down, that is a great for your regular retirement plan contributions to be added to your account, since you’ll be buying at lower prices, and that increases your wealth in the long-run. So, keep savings, and if you are under-saving, it is an even better time to increase your savings rate.
Keep your seatbelts on, and do your best to enjoy the ride.