by Richard H. Fogg, CFP®

How to Respond to a Volatile Market Environment

There’s no denying that the stock market can periodically give investors a scare. We were reminded of this again in October when the Dow Jones Industrial Average lost nearly 900 points in under a week – its worse drop since early 2014. When such dramatic movements occur, some people react by running from the market and moving money out of stocks. They’re inclined to wait for the investment environment to improve. The problem is that by the time many investors regain confidence in the market, they’ve already missed a good portion of the recovery stocks may have enjoyed.

How should you manage your portfolio in times when markets are experiencing significant volatility? A starting point is to conduct an honest assessment (or reassessment) of your tolerance for investment risk. And it should be more than a theoretical exercise. You need to be realistic about how much of a loss you are willing to take in your portfolio over a short-term period. Conducting this assessment may guide what percentage of your portfolio you want to keep invested in the stock market.

There are two important points to remember as you assess your risk tolerance:

  1.  If you have years to let your portfolio work, there is a greater likelihood that losses you sustain in the market over a short period of time could be recovered.
  2. The less you are willing to risk in the stock market, the more modest your investment returns may be. While you can limit market risk by reducing the percentage of stocks in your portfolio, it also may make it more challenging for you to achieve your investment goals.
    The key is to find the happy medium – a level of risk that allows you to sleep at night, while still having a sufficient amount invested in stocks to keep you on track to reach your goals. Your age and investment time horizon have a lot to do with how you should prepare to deal with volatile markets.

If you’re focused on accumulating wealth, time is on your side.

For those who are at least ten years from retirement, there is little reason to become overly concerned when the market goes through its inevitable periods of volatility. Sometimes these up-and-down swings can be a bit unnerving. What’s most important is to position your portfolio in a way that is consistent with your long-term investment objectives and the amount of fluctuation you can live with. In fact, a market downturn can be an opportunity to put more money to work in stocks at more attractive prices.

If you’re closing in on retirement, you may want to take a closer look.

The last decade before retiring is not a time to take chances. Many people learned this lesson the hard way during the market downturn of 2008. Those planning to retire near that time who had most or all of their money in stocks saw their nest eggs take a significant hit. It can make sense to re-allocate some assets in your portfolio to traditionally less risky asset classes (such as bonds and cash) to reduce your risk exposure as retirement nears. But given the likelihood that retirement could last twenty to thirty years (or longer), most retirees still want to have a portion of their money invested in stocks. The level of return equities can generate is critical to meet the income needs over an extended period of retirement.

Stay focused on your long-term goals.

Significant moves in the stock market (in either direction) can be a serious distraction when it comes to achieving your ultimate financial goals. Don’t let the headlines of the day carry too much influence over your investment strategy. Try to keep your portfolio on a steady course. Volatile periods in the market can create good opportunities to either invest more or to adjust your portfolio as needed. But make sure any investment decisions you make are in the long-term interests of achieving your financial objectives.

The Dow Jones Industrial Average (DJIA) is an index containing stocks of thirty Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.


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