Market volatility is the name of the game. No matter how much we try to predict the future, year after year the markets throw surprises at us. Case in point: At the end of 2018, many experts thought the S&P 500 would grow by only 5%, (1) but as 2019 drew to a close, the S&P 500 was sitting at a 29% gain. (2) Then there are all those external events that also throw a wrench into market cycles, like the upcoming election and the massive effects of COVID-19.
As much as we hate to admit it, volatility is normal. So rather than fear ups and downs, do what you can to prepare for them. Here are a few things to keep in mind that will help you prepare your finances for any volatility that comes your way.
Avoid Emotional Investing
First, let’s talk about what you shouldn’t do. One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above-average returns. A 2018 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. (3) Simply put, behavioral biases lead to poor investment decision-making.
You also don’t want to start making major changes to your account in anticipation of a downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms. For example, in a panic, some investors may sell stocks and pursue safer investments like annuities, bonds, and cash.
Instead, relying on an experienced professional to help you understand your options and control the risk you take with your retirement money can allow you to react unemotionally to a rising and falling stock market—rather than guessing what to do next.
Diversify Your Investments
In the 1990s, investors placed their money heavily into the early e-commerce sites, and when that bubble burst, it birthed what is now famously known as “The Dotcom Crash.” (4) When people were losing faith in the stock market, they looked at real estate as well as their own homes as the place to focus their sights (and money) on. However, the constant speculation and unsustainable rise in home values eventually led to the Housing Market Crash of 2008, (5) and eventually bled into the Great Recession. If history teaches us anything, you never want to put all of your eggs in one basket as there is no guarantee that the basket won’t fall.
Instead, it is often a good idea to diversify your portfolio with a combination of different investment sources. Modify your portfolio to include stocks of varying risk levels (safe, moderate, and high risk), and spread your money out between stocks, bonds, funds, and investments in different sectors. In this way, you can minimize the impact that any one losing investment can have on your overall portfolio performance.
Diversify Your Income
Economic downturns often go hand in hand with job instability. So, in addition to diversifying your investments, consider diversifying your income sources as well. Besides your salary, consider where other sources of income can and will be coming from. This might mean investing in rental real estate or other income-producing investments such as higher-yielding stocks and bonds, picking up a side job, starting your own small business, or doing some consulting work. The more diversified your income, the safer you’ll be.
Create An Emergency Fund
This strategy is all about preserving the wealth you’ve accumulated to this point. While cash investments may not provide a lot of growth, having a cash contingency fund with at least six months of living expenses will protect you against having to sell investments at low values to free up cash. Examine spending patterns and find ways to tuck away even more into cash or cash equivalents, such as short-term bonds, certificates of deposit, or Treasury bills.
Stop Trying To Predict When The Next One Is Coming
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it.
Darrell Bryant, CFS®, CAS® is Omaha’s Retirement Strategist. As the founder of D. Bryant Retirement Strategies, he focuses on helping individuals and couples nearing retirement do so successfully. Along with more than 30 years of experience, he received the Certified Fund Specialist (CFS®) designation and a Certified Annuity Specialist (CAS®) designation from the Institute of Business & Finance. Passionate about helping as many people as possible in his community, he hosts Retirement Strategies Radio, heard Saturday mornings at 8:00 a.m. on 1110 KFAB. He has also written articles on financial planning that have been featured on Fortune.com, FoxBusiness.com, Money.com, and in the Midland Business Journal. To learn more, visit his blog, his website, or connect with him on LinkedIn.