By Susan Barnett
Special to the Reporter
After months of volatility, stocks have entered a bear market. Many investors are seeing losses in their retirement accounts, the ups and downs of the market, and news coverage that may, understandably, have them feeling anxious or uncertain.
In times of market volatility, it’s important for investors to make sound decisions and avoid a reactive response. Investors should remember that having a well-built financial strategy can help them prepare for market volatility, and they should maintain a long-term view when it comes to their investing strategy.
Here are a few reminders for investors who might be feeling uneasy by the current bear market.
Market volatility is completely normal
It’s important for investors to remember that volatility is completely normal. Market swings can be painful, but they are a natural part of investing. You can think of it as a consequence of being able to grow your investments in the long run.
If your financial goals are far into the future, remember that the market has a tendency to recover from bumpy periods and continue appreciating over time. The S&P has seen average intra-year drops of 14%, but still generated positive returns in 32 of 42 years. This is why it’s so important to stick to your long-term plan and stay invested. Remember what you’re investing for and when you’ll need that money. Selling your investments out of panic will just lock in your losses and halting or decreasing your retirement plan contributions can have negative consequences on your long-term investment returns. Don’t let impulse or emotions derail your plan.
Investing for the long run
It can be helpful for investors to look at historical market performance to understand why it’s so important to stay invested for the long term. Some of the market’s worst days have historically been followed by some of its best days. Over the past 20 years, seven of the best days happened within just about two weeks of the 10 worst days. Missing some of the market’s best days could also impact your investment performance in the long run.
Remember, it’s about time in the market, not timing the market. The amount of time you are invested in the market is one of the most important factors in growing your wealth. Investors should stay disciplined and focus on their long-term strategy.
Gauging your risk tolerance
Periods of market volatility are a good reminder of the importance of gauging your risk tolerance. Put simply, your risk tolerance is your ability to handle potential investment losses without panicking or losing sleep.
To help determine their risk tolerance, investors should ask themselves these questions:
How comfortable are you with risk?
During a market downturn, how will you react if your account balances show losses? It’s important to consider how much loss you can stomach in times of market decline.
What is your investing timeline?
When you need your money is an important component to consider. Once you can map out your timeline, it can help you determine how much risk you are able to take on.
For example, if you don’t need the money for another 30 or more years, then your investments have more time to recover from potential market dips. Knowing you have several decades to ride things out, you can take on more risk. But if your investing timeline is closer to ten years, then you should probably be more conservative with your risk tolerance.
What does the rest of your financial picture look like?
It’s important to consider your overall financial picture. This includes emergency savings, debt and all of your investment accounts. Remember, you should consider having a cash emergency fund of 3-6 months for times when you need to quickly access money. You want to avoid being in a position where you have to sell your investments to deal with an unexpected emergency.
Investors should also remember the importance of diversification. You don’t want to have all of your eggs in one basket. Diversification can help even out your portfolio’s returns during periods of volatility.
Market volatility is stressful, but investors should have a long-term strategy in place and remember what exactly they are investing for. Remember, volatility is normal and history shows the value of staying invested for the long run. Don’t let your emotions trigger an impulse decision — stay the course and focus on your long-term plan.
Susan Barnett is a private client adviser for J.P. Morgan Wealth Management based in Mercer Island. In 2022, she was named a Forbes best-in-state woman wealth adviser.
