When Market and Investment Volatility Strikes: Three Principles to Follow

Market and investment volatility is an inescapable aspect of the financial world. Each year brings periods of turbulence that can ignite uncertainty, lead to emotional decision-making, and tempt us to veer off our well-thought-out financial plans. Yet, these volatile times do not have to derail your investment strategy. By adhering to three guiding principles, you can navigate challenging times with confidence and keep your financial goals on track.

Principle 1: Stay Focused on Long-Term Goals

Staying focused on your long-term goals is crucial during market volatility. While fluctuations can be unsettling, they are often temporary. It’s vital to remember why you started investing—be it retirement savings, funding a child’s education, building wealth over time, or saving for a business investment. Maintaining a long-term view prevents short-term market swings from clouding your judgment and leading to impulsive decisions, such as selling investments during downturns or chasing high-performance assets during upswings.

When markets are in turmoil or riding high, it’s easy to focus on what’s happening in the present.  Historical data supports the wisdom of perseverance and that markets tend to recover from downturns and staying invested increases your chances of benefiting from the recovery. For instance, since 1950, the S&P 500 has faced intra-year drawdowns averaging 14%, yet it has also provided an average total annual return of near 9%.

To effectively implement this principle, revisit your financial plan. Ensure your investments align with your goals, time horizon, and risk capacity. If so, remember short-term volatility should not change long-term objectives. Avoid obsessive portfolio checks; instead, schedule regular reviews—quarterly or semi-annually—to assess alignment with your long-term objectives.

Principle 2: Reposition, Don’t Abandon

Another key principle is to look at repositioning your portfolio without abandoning your strategy. Market volatility brings both challenges and opportunities. Instead of abandoning low-performing investments out of fear or staying with high-performing investments out of overconfidence, consider whether repositioning could harness the market’s changing conditions to your advantage. This proactive approach allows for portfolio adjustments that align better with market realities while staying true to long-term goals.

Begin by evaluating your portfolio’s current allocations. Identify areas that no longer suit your objectives or risk tolerance. If certain investments have become too risky, consider reallocating to lower-risk options. Moreover, market downturns can be an opportunity to invest in undervalued assets. Younger investors, in particular, may benefit by entering the market at discounted rates. Rebalancing your portfolio to maintain your desired balance between stocks, bonds, and other investments can work your portfolio towards aligning with your goals without exposing you to excess risk.

For more insights on repositioning your assets appropriately, consider reading my article, Location, Location, Location: When It Comes to Assets, Don’t Ignore Allocation.

Principle 3: Keep Emotions in Check and Communicate

Emotional decision-making is one of the greatest threats to successful investing, which is why it’s crucial to keep emotions in check and communicate openly. Fear-driven decisions often result in missed opportunities. For example, going to cash during a downturn or panic selling locks in losses, preventing you from benefiting from potential recovery. Conversely, overconfidence during rallies can lead to excessive risk-taking.

Open communication with yourself, financial advisors, and household members helps ground your investment decisions in rational analysis. Recognize your emotional triggers and develop strategies to manage them. This can mitigate risks tied to impulsive action. Whether it’s resisting the urge to sell during declines by reminding yourself of your plan or setting guardrails for how much of your portfolio is allocated to individual stocks or speculative investments, maintaining an open dialogue with your team supports better decision-making.

If you need guidance, engaging with a financial advisor can offer personalized insights and help navigate uncertain times.

Final Thoughts

Market and investment volatility, while unsettling, does not have to derail your financial journey. Remember, every year historically brings drawdowns in the S&P 500 averaging 14%. By staying focused on long-term goals, repositioning your portfolio, and keeping emotions in check, you can navigate turbulent times with the confidence needed to fulfill your objectives. Remember, volatility is a natural part of investing. Ultimately, periods of uncertainty often present growth opportunities. Stay disciplined, remain informed, and trust in the power of a well-thought-out financial plan.