Asset Allocation in Volatile Markets
Volatility perennially influences people to consider pulling their money out. Many are hesitant to put it back in until markets “correct” and all seems “normal” again.
Well, volatility is the new normal.
Here are some thoughts to keep in mind about volatility, and some retirement investing advice to consider in the face of wild market swings.
Volatile Doesn’t Always Mean Down
Volatility in a market isn’t unidirectional. What goes up, also goes down, and then goes back up again. Volatility is just a measurement of a market’s tendency to rise or fall within a short period of time.
When the news reports a drop in various indexes, you might perceive it as sudden. But often it’s the result of cyclical changes that could mean upturns or downturns. This bears itself out when viewed over time. There’s a natural ebb and flow to markets even if there are periods of sharp rises and falls.
While downturns are inevitable, the market trends toward the positive over time. Keep that in the back of your mind. Over the last 30 years, the average stock market return was 10.72%.
Reevaluate Risk
Knowing your goals and your time horizon will help you determine the level of volatility you can stand. It can also help shape your strategies and asset allocations moving forward.
Your goal could be to have enough (retirement) savings to create the lifestyle you want (in retirement). The time horizon is calculated by counting the number of years remaining until you plan to stop working.
These three variables (risk tolerance, goals, and time horizon) will help determine where on the investment strategy continuum you will be comfortable. People generally tend to fall somewhere between aggressive and conservative.
Strategies for Investing in a Volatile Market
Stay the course
No matter which strategy you choose, it’s important to keep saving for retirement. Adjusting your strategy is fine, but pulling your money out of the market will most likely hurt no one but yourself.
The longer you look back at the market, the more its upward trend becomes clear.
In November 1982, the Dow Jones sat at around 2,500. As of January 2022, it’s trading (sometimes wildly) above 35,000. Anyone who pulled their money out in 2009, when the recession was at its worst, missed the benefits of the market roaring back to its current level.
Don’t try to time markets
The only thing predictable about the market is that it’s unpredictable. A lot of people try to predict when an upturn or downturn will occur and get it wrong.
Predicting a rise can mean losing money by selling stocks at the wrong time. Trying to predict a drop can mean overpaying for an investment.
Some of the biggest gains occur in just a few trading days that are hard to predict. It could be a corporation’s earnings or a popular IPO that starts a rally that boosts your portfolio. To benefit from these gains, your money needs to be in the market on the days those rallies occur. So, keep your money put, and your retirement nest egg will grow.
Adjust and diversify
Having a mix of stocks, bonds, and cash has always been the foundation of a healthy, diversified retirement plan. The percentage of each determines the delicate balance that gets the most return for the level of risk you can be comfortable with.
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